Bleed is experienced by a player when her thoghts and feelings are influenced by those of her character, or vice versa. With increasing bleed, the border between player and character becomes more and more transparent. It makes sense to think of the degree of bleed as a measure of how separated different levels of play (actual/inner/meta) are.
Bleed is instrumental for horror role-playing: It is often harder to scare the player through the character than the other way around. An overt secluded dice roll against a player's perception stat is likely to make the character more catious.
A classic example of bleed is when a player's affection for another player carries over into the game or influences her character's perception of the other's character.
When a man start shaving his pubic hair and then continues to expand the shaved area until it looks like a pair of speedos of no hair.
I walked out of the bathroom with what looked like a reverse Speedo. I had become so caught up in the clean-up effort that I had totally forsaken any attempt to blend. Each swath removed led to another that seemingly needed to go. The end result was a totally unnatural ruler-straight line of hair running across my waist about two inches below my belly button and oddly smooth upper thighs.