Why do headphones sound so good...

I strongly question your presumption, that they do indeed sound better. I've had both (AKG k1000, Senn HD650, etc.) and a few speaker systems. There's no way headphones can replace a speaker system. Headphones are good for not waking up your neighbors or roommates. That's it.

I have found that headphones sound different, not always better. Since you do not have to deal with room acoustics, it is easier to design a good set of full range headphones. These are easier to drive and do not have the amplification requirements of speakers as well. Most people do not give speakers enough power. Meshing the speakers with a sub is another difficult task.
For what it's worth, I love my headphone setup. There are so many things it excels at. I still find myself listening to speakers more than headphones. The stereo separation in headphones can be unnatural on many recordings, and you don't get the full experience where you feel the music as well. It makes a bit of difference. Hard to describe.
Of course to get a speaker setup on par with a good headphone setup, costs about 5-10X as much.

Headphones move so little air that they usually outperform most consumer speakers in terms of distortion. They also help cut out or reduce ambient noise. For critical listening or adjustments, headphones are very useful....but the sound is awful!

Unfortunately we learn from birth to have an awareness of space (natural reverberation) from the way the brain processes the signals reaching the ear. (If you step into a anechoic chamber it can actually be nauseating as your eyes tell you something that your ears contradict!)

Unfortunately headphones sound far from natural - they seem claustrophobic or closed in or like the sound is coming from "within your head". The brain correctly detects the spatial information in the stereo sound as coming directly from one side or the other and following a line through your ears into your head. In essence, the brain figures out that the source is not from the front, above, behind or underneath but directly from the sides; so the sound image just seems to pass through your head from side to side (the band is playing in your head).

Basically the diffractive role of the pinea is negated in this configuration.

I agree that headphones sound awesome. I have Sennheisers and they are wonderful. Detailed, open, great bass and seem to make most every recording sound much better than thru all but the best speakers. They don't replace my speakers but when I really want to "get into" music, I put on my phones!

Well Amplifying an Ipod through a good resolution system will never sound as good as it going through headphones #1, To much exposure to the lower quality source in most cases...

I thought I would never beat headphones myself, mainly they are just easier and you can get good quality cheaper, and main thing is you are not fighting the acoustics of a large room and airspace, they are 1" from your ear drum, huge difference.

However after many battles, I have found the solution that stomps my Grado's, and thats Excellent room treatments with very efficient speakers and tube amps... Now I feel like I have more pressure and smooth controlled sound than even with headphones, and yes it even sounds better like a live venue in the house.. I have people tell me all the time they can't believe how clear and balanced even compared to headphones my system is now.

So room treatments will be like the earmuffs sealing to your ear if your willing to truly solve the issues with an audio system, its 9 times out of 10 the room environment not the speakers, and thats where the headphones have one up in the first place, cause they don't compete with a crappy room!