That's fundamental to how anything that compresses/understands the world has to work, in the Kolmogeravian sense. That's why people denigrate LLMs as being just "next token predictors" - they're not wrong, but they're missing the point.

Because to do that kind of prediction out in the world you have to build up an accurate model of reality - a model that includes yourself! Which is why we and LLMs are self aware.

For the "how", it's been known for some time that LLMs operate on a Reimannian manifold - the semantic manifold - and that's a good place to start if you want to learn how they actually work; how a Reimannian manifold (plus some extra structure on top) can represent natural language in a form you can do work with is the part I find particularly beautiful. At a high level, the neocortex and LLMs appear to compute on the manifold in basically the same way - though a lot of the details are different; both are more sophisticated in some areas and less in others.