You can read more about proprioception - the reason this sort of mind trick works so well is because the healthy mind and body gets screwed up on a constant basis. Add in a little illusion, you can trick it into believing anything.
Oh yeah, i remember this from about a year ago, cool stuff. There was another one where they attached a third-person camera on the subject's back with that video being fed back into the wearer's VR headset. Things should become even more immersive now that the Oculus exists, but i'm not sure if there's anything about tactile feedback yet. I remember Kurzweil mentioning tight body suits and gloves in his book, but i've yet to see one of those on kickstarter :)
I kept waiting for one of them to slam a hammer onto the dummy legs/crotch/foot and see the reaction. :(