While I've never heard of this being used as a game between people like in etouffee's writeup, it's something I do all of the time to come up with story ideas and to work on my characterization and general writing skills.
This can be a fun solo game to play. I try to imagine what someone else sees and feels. If I’m sitting in my car at a long stoplight in Denver, I try to look around and notice what’s really going on, paying attention to the things that are normally ignored as extraneous background clutter. For example, last week I watched a couple have an argument on the sidewalk at a bus stop. I picked one of them and tried to imagine everything they saw from their perspective. I couldn’t hear their words, so I came up with a reason for the argument. Because he was carrying two bags from a local supermarket, I scripted that they ran into an old flame of hers in one of the aisles. He didn’t like how she lit up when she saw him, and he’s now feeling that he’s not good enough for her. She wasn’t saying much back to him, so I imagined her tapping her foot, holding in a lot of the anger she’s feeling about how he conducts himself around other women. Finally she blurts out the way he’s feeling is exactly how she feels when she catches him staring at a younger woman’s bustline. Perhaps it’s a breakthrough for the couple, or perhaps it’s the end of the relationship, all because they decided to go to the store for some chips and salsa.
At the next light, I notice someone waiting for the signal to turn green in the opposite lane. They’re languidly sliding their gaze over everything, yet not actually seeing what they’re looking at. I imagine the elderly driver looking into my car and notice I’m watching her. It’s fun to imagine someone else peering at you, and trying to figure out how they perceive you. Perhaps she gets startled that someone is watching her, wondering if that big scary-looking man is a criminal searching for someone to rob. Or perhaps I remind her of a friend of her ex-husband, and that triggers a flood of memories and emotions.
When waiting in the security screening line at the airport, it's fun to add in silly reasons people are traveling. As they step up to the TSA agent, try to script something hilarious. Maybe the eighty year old woman has run away from the retirement home to join the circus as a trapeze artist. Perhaps that clean-cut young man is trying to smuggle the brain of a nuclear scientist to North Korea, not knowing it only works when installed in its original chassis. Have them say things to the bored agent, who just stamps their papers and waves them through. He has some Bluetooth headphones on and he's paying attention to the baseball game.