This is accomplished by the delays created between direct into the ear sound and reflections off the outer ear folds.
These reflections create "comb" filters in the audio spectrum which we learn to associate with direction. Its remarkable.
A test to prove this was so was to fill the outer ear with plasticine and perform localization tests on subjects. They could not localize sound in that condition.
The early work as I recall was at the Heinrich Herz institute in the mid 1970s.
I am suspicious that part of what this article is reporting is due to phase cancellation effects causing similar filtration that people can hear as timbre change rather than actually detecting the time delay.
(Source: My recording engineering final paper)