I was searching for the same thing and kept coming across this post so I figured I would share the answer I found. It seems that the Externalization effect is similar to 3D or other positional effects. Ordinary headphone sound might feel like it's coming from inside your head instead of from outside your ears. So Externalization processes and repositions the sound so that it feels like it's coming from an external source, not the headphones or your own head.
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