Localization refers to our ability to place a sound source in space. We use a number of audible cues for this purpose. One such cue is the interaural time difference or ITD. This refers to the difference in time it take a sound to reach one ear compared to the other. Sounds located directly in front of or behind us will reach both ear simultaneously. If the angle of the source is moved until the difference is greater than 20 microseconds (millionths of a second), a difference in location can be perceived. As a source moves more directly to one side of your head or the other, our ability to discriminate its location using the ITD method diminishes somewhat.
A second mechanism, called the interaural intensity difference or IID uses the difference in amplitude caused by the head physically masking sounds coming from one side or the other. Because lower frequencies with longer wavelengths refract more easily around objects, this mechanism is more effective for higher frequencies. The shape of the pinna (outer ear flap) also filters frequencies depending on their angle of incidence. The pinna is also responsible for our ability to place sounds in the vertical plane using this filtering mechanism. Try folding your ear flap over and see how well you can still place sounds. Sound waves reflecting off the shoulder also provide some location cues. All of these mechanisms are useless below approximately 270 Hz.
A phenomenon to keep in mind when placing loudspeakers is the precedence effect, in which a listener receiving the same signal from multiple speakers will place it at the closest speaker and not in between unless the time difference between the signals is less than a millisecond. This is why you should try to sit in a central location at an electronic music concert!
In judging the apparent size of an acoustic space, the aural cues depend on many factors, including the time elapsed from hearing the source sound to hearing the earliest reflections, the onset of reverberation, the intensity and duration of reverberation, diffusion of high frequencies and the resonant frequencies of the reverberation. With multi-channel sound and control over artificial reverb, many interesting and novel spatial effects can be created.