"In physics, the observer effect is the theory that simply observing a situation or phenomenon necessarily changes that phenomenon. A commonplace example is checking the pressure in an automobile tire; this is difficult to do without letting out some of the air, thus changing the pressure."
– Wikipedia, The Observer Effect 
The observer effect is simple enough to understand. At the microscopic level, as you might imagine, things can get pretty extreme. This leads to what Heisenberg called the uncertainty principle , which basically states that there are fundamental limits to what can be observed, regardless of technological advancement.
At the lowest level, for particles, observation does not just have an effect like reducing the pressure of a tire. Observing a particle can change the way it behaves entirely. Instead of normal wave-particle duality, a particle completely loses its wave properties when observed .
This is a big deal and is at the heart of quantum mechanics . In a nutshell, electrons normally act as misty waves traveling through space. Somehow even a single electron can have a mist of waves that cancel each other out, creating an interference pattern . Instead of existing in a single location, the electron has a probability of existing in a range of locations in this wavy mist. Once observed, the electron stops acting as a wave and has a definite location instead.
Physicists find this phenomenon very odd. Why do particles act as statistical probabilities until they are observed? The idea was first formulated in the 1930s, commonly known by the Schrödinger's cat thought experiment . Eighty years later experiments still confirm the phenomenon.
This has led many to believe that the universe only exists when observed. That behind our backs everything is just a probability. But once we turn around things turn from a probability to an actual event.
Interestingly, this is how video games work. The game system only needs to process what is displayed on the screen. It does not process what is behind you until you turn around. It would be an unnecessary use of computing resources to render what is not seen.
Does this mean our world is a video game? This actually is not an uncommon belief. As demonstrated in the movie The Matrix, it is possible that we exist inside a computer. The idea that we may live in some form of the Matrix is known as simulation theory . If we do live in a simulation, it would make sense that particles do not have a definite position until they are observed, just like how video games work.
A recent interview between Scott Adams and Naval Ravikant  discusses this:
"There are very high odds that we are living in a simulation. [...] If you look at a 3d graphics game, they don't bother rendering any part of the world you're not looking at. Quantum mechanics hints at this. The observer affects the outcome. Without an observer it is not clear anything is happening. [...] The universe is maximally efficient. In a maximally efficient universe, you wouldn't bother rendering things you don't need."
– Naval Ravikant 
One big problem is that physicists argue this is a misinterpretation of the observer effect. Werner Heisenberg, who created the uncertainty principle in 1927, argued in lectures in the 1950s:
"Of course the introduction of the observer must not be misunderstood to imply that some kind of subjective features are to be brought into the description of nature. The observer has, rather, only the function of registering decisions, i.e., processes in space and time, and it does not matter whether the observer is an apparatus or a human being; but the registration, i.e., the transition from the "possible" to the "actual," is absolutely necessary here and cannot be omitted from the interpretation of quantum theory."
– Werner Heisenberg 
Renowned physicist Richard Feynman said:
"Nature does not know what you are looking at, and she behaves the way she is going to behave whether you bother to take down the data or not."
– Richard Feynman 
For simplicity, I will call this the human observer misinterpretation (HOM). Which incorrectly assumes particles only have a position when humans observe them. Despite physicists arguing against this misinterpretation, it still remains a popular belief to this day.
If HOM is wrong, does this mean simulation theory is wrong too? No, even though it makes for a compelling argument, simulation theory is not dependent on HOM. Even if every microscopic corner of the universe must be computed, we may still live in a simulation.
If you think about it, if HOM were true, it would be the most profound discovery of all time. It would imply that the universe was created for us. That the universe only exists when humans observe it. That when we look up at the stars, they are only there because we are looking at them. And when no one is looking, they do not exist.
Not only is there no evidence to support HOM, it may be necessarily impossible. And in fact, video games are not much different. Yes, video games only render what needs to be displayed. But, rendering only refers to creating the image to be displayed. It does not mean there is not additional information that the game must store about the environment.
For most 3d games, almost all environmental information must be stored regardless if it is being rendered or not. For instance, if an enemy is coming, they will not disappear if you turn around. The game continues to calculate and store the position and actions of the enemy even if it is behind you.
Video games reduce the amount that needs to be processed by limiting the size of the environment or allowing logical inconsistencies. For instance if you get far enough away from an enemy it will often disappear. And if you return it will have reset its position. Thus far we have not found limits to our universe or these types of logical inconsistencies.
This means evidence suggests the universe is processing everything. If you leave food cooking overnight, does it disappear when you leave the room? When you wake up in the morning does it suddenly realize it is being observed and calculate the information for the entire night in order to be rendered?
What if when processing the night of cooking it turns out the food caught on fire? It cannot retroactively go back to the middle of the night to cause a fire. The only way it could cause the fire in the middle of the night, without having to process everything, is if it knew it was going to be observed later, which would imply we do not have free will.
This is the crux of why everything must be processed, because if something is only rendered when observed, it must go back and process the entire history, which may include events that would affect the present in other ways. In order to resolve this conflict, either everything must be processed in real-time, or the universe must know what we will observe in advance, meaning no free will.
A universe where everything must be processed means that humans are only a minuscule amount of the processing required for the universe, assuming we are in a simulation. In physics terms, a universe where everything actually exists means that humans are only a minuscule amount of the matter and energy in the universe.
This is not an unfamiliar thought. As humans have discovered more of the universe we have realized we are a smaller and smaller part of it. This does not mean humans and our planet are any less amazing though. It just means there are many more amazing possibilities. We may occupy a tiny space in a cosmic sized painting, but that does not make our part of it any less magnificent.