The device seems to work like this: The weight attached to the arm always pulls down. You tilt the camera right, the weight moves left and up so it pulls against the tilt. Same for forward/backward tilt etc. The red knobs seem to be for adjusting where exactly the camera sits relative to the weight.
now to your question:
If the arm holding the weights were shorter/longer, would the stabilizing effect be affected? Would the centre of gravity change if the arm lengths were different (and thus affecting stability)?
The weight needs to be under the center of gravity of the grip+camera, else the stabilization would not work. The stabilization effect will be greater when the weight is lower (along a vertical line) as the weight will have a longer lever to pull back against tilt.
If my description is unclear, do a home experiment: Take a hammer at the grip so that the hammer head is on the side of your little finger and downward, see how easy or hard it is to tilt the hammer depending on where you grip the shaft. You may also want to walk around holding your camera and something about as heavy as the steadicam in one hand, to see if it's comfortable for you.