The correct position is with the mirror in the down position, and adjusted for normal rear vision. When the mirror is tilted up, during daylight you will see the rear of the headliner. However, at night, you will see approaching headlights at approximately half brightness. You aren't intended to look out the rear window in the up position, just to see the reflected light. The path that the reflected light takes through the mirror housing causes the dimming effect.

I can't believe this isn't well known. My 1966 Mustang had the same feature, and it wasn't invented then, it had been around for years. Don't they teach this stuff in driver's ed?

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2007 X3 3.0si, 6 MT, Premium, White

Retired:
2008 535i, 6 MT, M Sport, Premium, Space Grey
2003 X5 3.0 Steptronic, Premium, Titanium Silver
2002 325xi 5 MT, Steel Grey
2004 Z4 3.0 Premium, Sport, SMG, Maldives Blue