I think that saying "whatever you drop is free game" is oversimplifying things, and not taking into account that dropping itself doesn't work realistically.
When IRL you drop something, then you are not only able to keep an eye on it, but you also can immediately spot others trying to take it, usually way before they actually take it. In PS, you can pickup items and noone knows until the item disappeared. IRL, you could intervene, like put a hand over it or just snatch the item before the other person can take it. All of this is not possible in PS, and somehow I doubt it's feasibility.
Therefore I prefer the workings that have been proposed, even though they are less realistic. I even think that it's less realistic to be robbed of something that you put on the ground than something that you carry in your bags, because your attention is focused on it.
Even more problems arise when things are meant to represent things that aren't there, like trees, for RP purposes.
As has been said, you should have a max of items you can have on the ground at any given time, they could become free game if you leave the area, and maybe after some time elapsed (though should be way longer than 15 minutes). If you try to put more items on the ground than the limit allows, then you should simply not be able to drop it. Also, the item should, as stated, remain in your inventory, including consuming weight and space there, since otherwise you could exploit this to carry more than you actually can.
This would also stop botted mining: if you cannot hold the next ore, then you are not allowed to continue mining, so you can at most bot until you filled your inventory, which isn't very long.
I am even inclined to believe that there should be no "drop and forfeit ownership" at all. Every item should go back into your inventory, and you need to get rid of it in a proper way if you really want to dump it.
Lastly, I think that picking up items from the ground in front of their owners is not at all "realistic stealing". It's an artifact of the game mechanics, nothing else.
Either this, or we need to actually create a realistic theft system, but that will have to use the skill system instead of empathic guards. If we had these empathic guards, then we also have anti-empathic thieves, so we're back to square 1.
Skill based (basic) approach:
Steal an item: effective pickpocketing skill vs. effective awareness (including pickpocketing and other similar factors of the owner).
Then you need to either remove any tracability from the item by yourself ("change origin" skill), or sell it to someone with that skill. When the prepared item is to be sold or inspected, the inspector tests "detect origin" vs. the quality of this item's origin (hidden attribute).
It is also possible to have a list of all origins and all attempts to modify them for each object (newer ones possibly blurring older ones), so that an inspection can turn up an owner other than the last it was stolen from.
This system could then be used for all kind of stealing, not just for items dropped by accident or for RP (both of which aren't "stealing", anyway).
Edit:
Not only NPCs would be performing this origin check, but PCs also. The player would then see a message in the inspection windoe indcating the result (with varying levels of confidence depending on all skills involved, age of the theft, distance to the original owner, connection to the owner, etc.). The player can then decide what to do about this info (ignore, use to haggle, turn the seller in, etc.).
Edit 2:
BTW, the idea of the automatic duel has the major problem that the community in PS, if one can call it that at all, doesn't work well enough for this. IOW, this will result in high-powered "thieves" stealing stuff in order to get a chance of doing some PK. And as we also know, these people will remain perfectly accepted by the "community". If anything, it will be declared as "way to RP evil" or at least "fair play, you shouldn't drop stuff, and if you are RPer and not PL, then bad for you".
I completely fail to see how picking up the decoration for a wedding party can even remotely be interpreted as "RPing evil" (or "RPing" at all, unless you're the janitor cleaning up after the party is done).
