Reflection and radiosity are two different beasts. A red torch bouncing off shiny steel armor turning objects around it red is more a function of reflection than radiosity. A better way to think of it is that radiosity is light that is regenerated from a surface, not reflected. When you illuminate a diffuse object, it becomes brighter than it was before. In a sense, it becomes a light source itself.
It is kind of like the moon at night. It is not as much reflecting the sun's light as it is radiating its own light energy. It becomes a distant point light source, rather than a mirror of the sun.
A highly reflective, non-diffuse surface may appear dimly lit unless you catch a direct reflection from the light source. However, a highly diffuse object that is illuminated appears bright and redistributes light as though it were another source of light in the room/scene.
The difficulty is that radiosity can become highly compute intensive, since almost every object/surface in the scene can become a light source of its own. Therefore, if you use radiosity, you will want to have sophisticated hardware and software for shading. ES has busted their tails and will impress everyone when they release AOE3, but they are really just the beneficiaries of the advance in graphics hardware. Still, kudos for being first to market - they are winning the RTS RTS game (think about it) in the real world.
One thing I will add, and if you have ever done photorealistic rendering you know this already, rendering is as hard to balance as gameplay. When you use refelction, radiosity, multiple light sources, ambient light and shadows, you can end up with some pretty bad looking images. And the problem is not always that they don't look realistic, it's that they don't allways look pleasing. It is pretty tough to produce a lighting and rendering model that looks good from every angle and that is what ES has to do here. That's why they have a guy working fulltime on water and another on cliffs.
Personally, I can't wait to see how it looks and plays when they're finished.
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