I think you know correctly, generally speaking.
I think it will depend upon the ground (is it bumpy or relatively uniform and smooth) and your grass type as to how low you can go. Those creeping grasses such as Zoysia can be cut pretty short - maybe 1.5 inches - while something like Kentucky Bluegrass or Fescue (most lawns have this) could be cut at up to, say, 3 inches. Zoysia is apparently hard to cut with some reel mowers. I don't have any of this but I could imagine it might be.
The point made most of the time by mowing (regardless of whether we're talking rotary or reel) is that you shouldn't cut more that 1/3 of the height off for the health of the grass. Personally, I live on a farm and the blades on the various mowers I have are set at the same height and it gets cut to that height regardless of what percentage it is cutting off of the grasses in the pasture.
Folks I've talked to in the past about their reel mower were cutting at 2 inches and did so, they said, for both the look and the shading the grass provided the ground. I guess what they were hoping was that it would help with lessening the drying up of the soil.