The "method of the loci", also known as the Memory Palace, is a mnemonic device, or a technique for remembering things. It is often used by people who compete in memory competitions. The method consists of imagining a room or set of rooms you are familiar with, and mentally walking through it, placing reminders of the things you are trying to remember in different locations in the representation of your room. I know that it works for me, since I used it at one time to remember complicated options for a set of unix commands.
Browsing Science Daily this morning, I found an article about research at the Norwegian University of Science and Technology's (NTNU) Kavli Institute for Systems Neuroscience and Centre for Neural Computation which may explain how method of the loci works.
They placed rats in 11 similar but distinct rooms, and let them run around seeking chocolate crumbs. The researchers monitored the activity of CA3 place cells in the brain's hippocampus as the rats explored. Place cells fire when an animal (humans included) enters a particular physical location. The researchers found that the brains of the rats would build a unique map for each room, and when a specific room has entered for a second time, the memory map created for that room earlier would activate.
This suggests that the method of the loci trick works by storing a memory of the thing you're trying to memorize with the memory map of the location. When you think about that location in detail, the thing appears along with the general characteristics of the place.
It would be interesting to know the limits of the technique. I was impressed when I used it a few years ago, and contestants in memory contests have used it to remember impressive ordered lists of things. But I wonder how it would hold up to something as complex as remembering a long list of equations, or learning a foreign language.
The Science Daily article has a link to the original study if you are interested in exploring this further.