You aren’t retarded, you just don’t know. Overly simplified it is what controls the massive part of the MMO. It allows you to develop a method to reduce the unneeded messages to the client. A common one is called quadtree for 2d games and octree for 3d games.
I found this (google search 
) http://cs.mcgill.ca/~jboula2/thesis.pdf
seems to be a good read