How is it that I can create a method in the controller and just put some arguments and it figures it out after I click on a form submit? Under the hood, how does it find the right method and how does it figure out that I just want those arguments?
In a nutshell:
The routing engine handles the HttpRequest, and checks the requested URL. When it finds the first route match, it creates a new instance of MvcRouteHandler and passes it the broken-up tokens of the URL in a RouteValueDictionary.
The route's MvcRouteHandler takes the request, and tries to instantiate a controller class instance. By convention, it looks for a class called "XXXXXXController", where the X's are replaced by the {controller} parameter in the route.
Once it finds the controller, it invokes the appropriate method on it, given by the {action} parameter of the route. Any named arguments, such as {id}, that exist in the route, are passed as parameters to the method.
Basically, everything that ASP.Net MVC "knows" comes from the route information. It can't divine the parameters from thin air - they have to come from the route parsing. If the information isn't present in the requested URL, it can't be passed into the method.
It should also be noted that you can override the behaviour of the framework by making your routes use alternate handlers instead of MvcRouteHandler. The framework is quite extensible, so you can plug in custom functionality at many points.