My family always says they pray to god, and he replies to them. My mom says that he talks to her and them through their heart.
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Why do they "hear" from "god"? What are they hearing that I'm not? Is it all in their head? Is this some type of phenomenon?

Note that your mom describes perceiving it "through [her] heart". Obviously then, this isn't actual acoustic hearing. Instead, your mother is using a metaphor.

I can't step in their heads and know what they are experiencing, but i speculate that it's something like this: When they pray, they experience a sensation. Perhaps every time, but it could also be just some of the time. It could be a sensation of calmness, or reduced anxiety, or elation, or invigoration, or others, or many at once. These are real sensations.

But what happens next is that they attribute these sensations to their god. In their mind this may be a fair attribution, since they already happen to believe their god exists, but there's actually no link showing that that was the cause of the sensation. After all, the same sensations can be achieved by a practitioner of buddhism, or a participant in a native american sweat lodge, or simply by someone jamming out to their favorite music.

[Kathy walters] apparently had powers to heal everyone. When she was touching everyone, I saw all these people freaking out and doing things as she "healed" them. But when she touched me, prayed for me, casted all these "demons" out of me, I felt nothing. I pretended to be happy afterwards, but nothing changed.

There are two things i'd like to point out.

1) If i had to guess, this was done in a very exuberant and energetic environment. These faith healings never happen in a sedate clinical setting, with someone patiently using a stethoscope to check your heartbeat. Instead, Kathy would be psyching up the crowd and getting them really into it.

This does a few things: first, it makes it fun (or funny, if you're on the outside). But more importantly, it puts you in an unusual state of mind. The blood is flowing, the adrenaline is pumping; you're in perfect condition to, well, experience atypical sensations which can then be attributed to god. That adrenaline can also mask pain, and make someone with an injury perceive (incorrectly) that that injury has gotten better. In other words, the ambiance is specifically designed to lead people to believe that a healing has taken place in a supernatural way, and so some people will come away thinking exactly that.

2) You say you pretended to be happy. I don't blame you for that, in fact i think it's exactly what you should have done to avoid being ostracized.

But do you think you were the only one to be pretending? Suppose that, say 1/5th of the healing recipients also felt nothing. Do you think they would have stopped the show and said "sorry Kathy, that didn't work, can you try again?" or said in front of the crowd "well, that didn't work; i want my money back." I think they would play along. I think some of them would even go over the top trying to sell it, mimicking seizures and the like.