Humans don’t interpret gray tones very well – the human visual system perceiving approximately 32 shades of gray. So an 8-bit image with 256 tones already contains too much information for humans to interpret. That’s why you don’t really see any more clarity in a 10-bit image with 1024 shades of gray than a 5-bit image with 32 shades of gray. But why do we only see approximately 32 shades of gray?
It is the responsibility of the rod receptors to deal with black and white. The rods are far less precise than the cones which deal with colour, but are more sensitive to low levels of light that are typically associated with being able to see in a dimly lit room, or at night. There are supposedly over 100 million rods in the retina, but this doesn’t help distinguish any more than 30-32 shades of gray. This may stem from evolutionary needs – in the natural world there are very few things that are actually gray – stones, some trunks of trees, weathered wood, so there was very little need to distinguish between more than a few shades of gray. From an evolutionary perspective, humans needed night vision because they lived half their lives in darkness. This advantage remained crucial, apart perhaps form the past 150 years or so.
The rods work so well that dark adapted humans can detect just a handful of photons hitting the retina. It is likely this is the reason there are so many rods in the retina – so that in exceedingly low levels of light as many as possible of the scarce photons are captured by rods. Figure 1 illustrates two grayscale optical illusions, which rely on our eyes insensitivity to shades of gray. In the image on the left, the horizontal strip of gray is actually the same shade throughout, although our eyes deceive us into thinking that it is light on the left and dark on the right. in the image on the right, the inner boxes are all the same shade of gray, even though they appear to be different.
To illustrate this further, consider the series of images in the figure below. The first image is the original colour image. The middle image shows that image converted to grayscale with 256 shades of gray. The image on the right shows the colour image converted to 4-bit grayscale, i.e. 16 shades of gray. Is there any perceptual difference between Fig.2b and 2c? Hardly.
You will see articles that suggest humans can see anywhere from 500-750 shades of gray. They are usually articles related to radiology, where radiologists interpret images like x-rays. The machines that take these medical images are capable of producing 10-bit or 12-bit images which are interpreted on systems capable of improving contrast. There may of course be people that can see more shades of gray, just like there are people with a condition called aphakia that possess ultraviolet vision (aphakia is a lack of a lens which normally blocks UV light, so they are able to perceive wavelengths up to 300nm). There are also tetrachromats who posses a fourth cone cell, allowing them to see up to 100 million colours.