What does the "rubber hand illusion" demonstrate?

The "rubber hand illusion" demonstrates the way in which the senses of touch, sight and proprioception (positional awareness) combine in human consciousness to establish a sense of one's individual body. The effect involves substituting one real hand for a fake (such as an inflated rubber glove) while concealing the real one with cardboard.

After a while of watching somebody simultaneously touch both the real and fake hands with paintbrushes, the owner of the real hand will eventually mistake the fake one as being real.

The effect was discovered by Pennsylvania psychologists in 1998. As well as being an informative science experiment, it makes for an impressive party trick.