Psychics use a variety of techniques that borrow from the magicians' repertoire as well as capitalizing on humans' many cognitive biases. In fact, there is a branch of stage magicians called mentalists who perform "psychic" readings while freely admitting that what they do is good-natured chicanery. First, let's take a look at the well-known mentalist Derren Brown as he performs a "seance":
Spooky! But not as spooky as the creeps who use these techniques to exploit vulnerable, grieving people who are desperate for answers. So, how is it done?
Cold Reading: This is a technique where a combination of highly probable guesses and cue reading is used to give the impression that the reader knows something they could not have possibly known. The reader starts (let's say in a seance where there is a large room full of people) by saying, for example, "John, I have a message for you from an old man who loved you dearly." Most large gatherings of people will include a John, and nearly all adults were once close to an old man who is now deceased. The reader then watches the individual's reactions to their probings, and uses very slight reactions to hone in on specifics. A skilled reader can use cold reading very convincingly.
Importantly, not all psychics are intentional fraudsters. Many believe they truly do have paranormal powers to know what other people are thinking. It is most likely that these people are unusually gifted in reading social cues, and have a special ability for reading facial twitches and tones of voice, rather than supernatural powers. As the psychic makes likely guesses, they will become increasingly confident in their "powers" aided by confirmation bias, selective memory, and confabulation.
Wanna know something cool? Even animals have been documented to use a kind of cold reading. Check out Clever Hans, the horse that could do arithmetic.
The Forer Effect: A component of cold reading, but also used in horoscopes and dubious personality tests, the Forer Effect is a cognitive bias where people are likely to interpret statements or predictions as having particular personal relevance. In fact, these statements often apply to just about everybody. In 1948, psychologist Bertram Forer provided research participants each with a "unique personality analysis" which they were asked to rate in terms of accuracy from 1 to 5. The average rating was 4.26, but the "unique personality analysis" was always the same:
You have a need for other people to like and admire you, and yet you tend to be critical of yourself. While you have some personality weaknesses you are generally able to compensate for them. You have considerable unused capacity that you have not turned to your advantage. Disciplined and self-controlled on the outside, you tend to be worrisome and insecure on the inside. At times you have serious doubts as to whether you have made the right decision or done the right thing. You prefer a certain amount of change and variety and become dissatisfied when hemmed in by restrictions and limitations. You also pride yourself as an independent thinker; and do not accept others' statements without satisfactory proof. But you have found it unwise to be too frank in revealing yourself to others. At times you are extroverted, affable, and sociable, while at other times you are introverted, wary, and reserved. Some of your aspirations tend to be rather unrealistic.
The analysis above was created by combining snippets of several horoscopes. The effect has been duplicated by other researchers many times, with most people claiming it to be 80% to 90% accurate.
Let's take another look at Derren, this time using the Forer Effect in a cold reading:
Hot Reading: This is when the reader uncovers private information about the target beforehand, and later uses this to their advantage. Many of the tv-psychics do this by placing microphones in the waiting room. The people who go on those shows usually have particular issues on their mind they are focused on, and will speak to them with other guests while waiting to appear. Then they are shocked, shocked I tell you when the psychic knows of these private concerns. Faith healers have been known to use prayer cards filled in before the show to know the particular afflictions of the sick (through God's grace, of course.) When combined with cold reading, the effect can be very convincing.
Let's take a look at how James Randi, noted mentalist and skeptic, debunks Uri Gellar and Peter Popoff who both used hot reading as well as cold reading (though Uri also uses a lot of standard stage magic.)
Randi has offered a $1,000,000 prize to anyone who can demonstrate psychic abilities under controlled conditions in a lab. To date, there have been over 150 applicants and no winners. You'd think all those psychics working at the 1-900 numbers and the beyond-the-grave tv shows would put their skills to more profitable applications - like taking up Randi on his offer, or predicting stock market trends, or lotto numbers. But no, they're content to have your money instead.