This is primarily due to the difference in pixels and ppi on your monitor versus the page size in word. If you were running a monitor resolution of 1280x1024, with an image in Photoshop that has 72 pixels per inch (a typical size) that takes up half the screen, the image would be 8.9 inches wide. The document in your Word program is 8.5 inches wide no matter what the resolution, so even though the image takes up only have the screen in Photoshop, it would fill the screen and then some in Word. The difference gets worse as monitor size as resolution increases. "Actual Size" in Photoshop is in relation to the screen resolution, not in relation to the actual print size.

This makes more sense when you consider that you can run a 1280x1024 resolution on a 17" monitor, a 19", a 24" or a 32" (not that anyone would). If the resolution is the same but the monitor size changes, the percentage of the screen taken up by the image remains the same. However, if you put a ruler up to the screen, the size of the image relative to the ruler would obviously change quite a bit.

-SW