I see what you're getting at here, but I'm not sure I agree. This may come down to semantics. I guess I don't see how an image can be "properly converted to JPEG" and still contain the dynamic range of the RAW. This can only be done using HDR techniques. Like you say if you crank down the contrast and saturation (which is a VERY good idea for histogram review so THANKS!) the JPG may contain close or even all of the dynamic range of the RAW, but if it looks like crap, how can you say that's "properly converted"? A JPG with "normal" looking contrast and saturation can never show the entire dynamic range of a RAW without doing HDR type techniques, or at least not until they create a JPG format with higher bit depth, and then monitors to display such things.
Think of it this way. The "Dynamic Range" is the brightest point minus the darkest point. When you take a RAW photo on a 12bit sensor the brightest point has a value of 4096, and the darkest point has a value of 0. This data is linear which sucks because our eyes perceive light logarithmically. When converting to JPEG all that is done to this RAW data is a Gamma curve is applied, and the data values are literally divided by 16 (i.e. the least significant 4 bits are removed). Now the gamma correction curve is a curve that that looks like this:
Source: Wikipedia
The critical thing to note here is that input is on the horizontal axis, and output is on the vertical axis. Note that the gamma correction curve goes from 0,0 to 1,1, and has intermediate values between that. The implication of this is that a value which was previously 0 will still stay 0, a value that was previously 4096 will stay at 4096. I.e. no dynamic range is lost in this conversion.
In the final step of the process divides everything by 16. I.e. the maximum brightness value the sensor has picked up was 4096 becomes 255. The maximum brightness point of the 8bit file. The same happens for the 0 point which stays 0.
From this the conclusion is that while data is rounded out and lost, this data is not visible. The difference between 255 and 254 is very difficult to see even on a perfectly calibrated monitor. The difference between 4096, and 4095 assuming we had such a screen would be below human perception. This data that is lost is critical in the calculations when doing gamma correction, and calculations such as increasing contrast to pull detail out of rounding errors,
but the take home message is: Assuming your camera doesn't screw with the image to "pretty it up" by cranking the brightness, contrast, or saturation or some such, the brightest point the sensor recorded will have a final value of 255 when converted to JPEG, meaning dynamic range is the same!
I saw you mentioned HDR. HDR requires more than one exposure at a different level to work. What I think you are talking about is the "tonemapping" process. It's not that the monitor can't display the bitdetph, it's that tonemapping a 12bit file pulls microcontrast out of shadows which would have been clobbered by rounding errors if converted to 8bits first. There is no extra dynamic range and the white and dark points stay the same. It just appears as though there's extra dynamic range because you have preserved more detail from rounding errors by playing with local contrast.
But...When we're looking at that image (or similarly the preview of a RAW file in <PP program of choice> ), isn't there part of the dynamic range that's simply not being displayed? I mean, where's that extra information come from, then, for highlight recovery?
Assuming you're already drawing the maximum dynamic range from the RAW, it is literally assumed. There really isn't extra dynamic range when you do recovery, and the detail never really is quite right when compared to an image that has a lower exposure. Consider a JPEG that has been converted from the RAW. The JPEG has 255,255,255 (clipped on all channels but one) but the RAW data may actually look like 4096, 4093, 4088 in the case of 12 bits. All of this would lead to rounding errors displaying the content as being clipped, and we may not even be able to tell the difference if we had a 12bit display, but software can do wonders with these differences.
Some maths:
Convert 4096, 4093, 4088 to 8bits: 255,255,255 after rounding errors.
Lets do some highlight recovery:
Increase contrast, can't everything is the same value. Reduce brightness by 10%: 230,230,230 still clipped with no detail but just darker than white.
Now lets Increase contrast on the original: gives 4096 (max value), 4064 (assumed), 4003 (calculated linearly). Reduce the brightness by 10%: 3686, 3658, 3603.
Convert to 8bit: 230, 229, 225 Volah, DETAIL!.
By doing calculations at 12bits you have more data to work at, thus can pull little stunts like this which would have been rounded out if you're working directly with 8bit data. But note that there is no additional dynamic range here to being with. 255 = 4096 is the maximum brightness, and 0 = 0 is the maximum darkness which define the dynamic range. This is purely pulling data out of details which would be lost due to rounding error if converted to 8bit first.
I'd like to think this post is 100% right, but it was a long post, and it's a weekend so please don't eat me if I've missed something.