Unless your blog is a secondary part of an existing website you should always install WordPress on the root directory. When I created my first blog I used an automatic WordPress instalation that my web hosting company offered, but the standard installation was done on “www.domain.com/blog”.
I was not sure how this would affect the blog therefore I decided to leave things as they were. A couple of months later when I started studying SEO I realized that this was a bad move. My blog could be accessed either through “www.domain.com” or “www.domain.com/blog”, meaning that the Homepage was duplicated. Secondly Google’s Pagerank was also being divided and some aggregators like Technorati were considering the two addresses as two different blogs.
This is my contribution to the “Blogging Mistakes” project. We already have 21 people participating, if you have not submitted your entry make sure you do so. The deadline is the midnight of Sunday. I am looking forward to reading your blogging mistakes!