The main intended use for an Atlas selector it for two separate throttles (cab A or cab B) to be able to control a train in a single block (an electrically insulated portion of the layout). The selector handles up to 4 blocks, and you can gang more selectors together for more blocks.
If your layout has Atlas electrical switches on it (Selectors, Controllers, Connectors, etc., etc.), then it will have common rail wiring. One wire from your throttle goes to the selector cab A, and the other wire goes to the common (ground) rail. If there is a second throttle, then one wire from it goes to the selector cab B, and its other wire also goes to the common (ground) rail.
Some model railroaders can get creative and use Atlas switches for other than intended. For example, a selector might also be used for one throttle only and merely turn power on or off to individual blocks. This could allow an operator to have more than one loco on the layout, but operate only one loco at a time if desired.
In your picture, the one yellow wire on the cab A screw is probably from your throttle, and the four red wires each go to a block. There is no throttle wire hooked up to the cab B screw, so sliding the switches down for cab B effectively shuts power off to the four red wires.
As per santafewillie's recommendation, a multi-meter or circuit tester would be beneficial for checking the selector to see if it is bad or not. And checking other wiring on the layout too, for that matter.
