Large images are bad because, like bandwidth traffic, limiting two simultaneous HTTP connections means the browser will not be able to load other components while the image is loading, so your JavaScript or something else may take a lot of time to process.
In addition, client-side processing time to re-scale this image will use processor cycles and slow down page rendering. It's not so bad on a fast desktop that you might think about, but even 1/10 of a second can affect the perception of page loading time (see point 5 here - 100 ms = 1% lost sales for Amazon). Mobile devices will be even more seriously affected by the need for resizing, as their processors are not so strong.
All that is associated with YSlow is that 90% of users' perceptions of speed are related to client-side processing, and not the download time from the server, which is why they are so uneasy about this.
Smaller images will also discard the processor when they change, and they will also look pixelated, so bad for this reason.
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