According to its creator, Dr. Michael Larson, there's a part of our brain called the Medial Superior Olive, which we use to pinpoint the location of sounds. For instance, if someone speaks by our left ear, the sound reaches the left hemisphere of the MSO first, and we use the delay between that and when it reaches the right hemisphere to understand the location. The Sleep Shepherd takes advantage of this by sending a series of left-right pulses that trick your MSO into thinking that you're rocking back and forth on a hammock. This, apparently, causes your brain into lowering the frequency of your brainwaves, and will eventually send you to sleep.
Once you've nodded off, the Sleep Shepherd will deactivate, but will continue to monitor your brainwaves, so if you start to wake up, the hat will resume activity. The company's Kickstarter page doesn't go into a lot of detail about how it does this, but given the (now defunct) Zeo was able to shrink a simple EEG unit into a headband, we'd guess that this takes a similar approach. There's also no word on how you'd set the device to rouse you in the morning, but hopefully a companion app is in the offering. Perhaps, instead, the plastic section at the top of the beanie that houses the rechargeable lithium ion battery has a set of manual controls, although I think an app is more likely.
As we mentioned, this device is on Kickstarter, and the company is hoping to raise $50,000 to go into mass production. A pledge of $140 will bag you a regular version of the Sleep Shepherd, or you can buy one for you and your partner for $270. The company is planning to ship by March 2015 and have demonstration models ready in time for CES this January, and you can bet that we'll be catching up with them at the show.