Yeah, that's about the jist of it. Dynamic lighting, unlike something like physics, is too complex to process realistically in real time, so a whole bunch of shortcuts that give an approximation of realistic lighting are used in lieu. This is also the principal reason why there is no universal standard lighting system, and why different engines utilize different lighting systems, unlike physics (Havok, essentially): no one has agreed on the best or most efficient shortcuts to take to get the best effect.
The worst problem with lighting is that it is applied to everything in the game world: while things like gravity are easy to apply because they only affect certain objects, lighting affects everything universally, at once. In Crysis, for example, it was not so much the foliage itself that caused systems to grind to a halt but rather that applying dynamic lighting to all of those leaves individually is a computing nightmare.