The first case doesn't manipulate the inheritance trees based upon an instance. For one thing, the Perl6 model won't affect instance2 just because instance1 does Foo. That is probably the biggest difference.
That's exactly what I would call manipulating the inheritance tree based upon an instance. The only other meaning I can think of (and I think it's the meaning you thought I meant) is that twiddling instance1 has an effect on all other instances. This would be an extremely pointless feature and isn't what I was talking about.
So to quote Ovid again (the whole sentence this time)
However, you can't have Elf subclass from Thief because not all elves are thieves unless you want to start toying with the idea of manipulating inheritance trees based upon an instance instead of a class (and all of the ridiculous problems that would bring.)
that reads to me like individual objects would have their own inheritance trees so some Elfs would subclass from Thief and some wouldn't. He calls this ridiculous but isn't that exactly what Perl 6 does?