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Theory theory says children collect evidence -- in form of gestures and expressions -- and use their everyday understanding of people to develop theories that explain and predict mental state of people they come in contact with.
Simulation theory states that we place ourselves in another person's "mental shoes", and use our own mind as a model for theirs.
But two theories are not mutually exclusive. If mirror neuron system is defective or damaged, and our ability to empathise is lost, observe-and-guess method of theory theory may be only option left. Some scientists suspect this is what happens in autistic people, whose mental disorder prevents them from understanding intentions and motives of others.
The idea is that mirror neuron systems of autistic individuals are somehow deficient, and that resulting "mind-blindness" prevents them from simulating experiences of others. For them, experience is more observed than lived, and emotional undercurrents that govern so much of our behaviour are inaccessible. They guess mental states of others through explicit theorising, but end result is a list of actions, gestures and expressions void of motive, intent, or emotion.
One recent experiment by Hugo Theoret and colleagues at University of Montreal showed that mirror neurons normally active during observation of hand movements in non-autistic individuals are silent in those who have autism.