Do people genuinely have that ability, to listen to a specific person and ignore the rest?
Asking because no matter how hard I try I can never understand a fucking thing if there's many people talking loudly in the background, it all mixes together into an incoherent whole.
https://en.m.wikipedia.org/wiki/Selective_auditory_attention
Indeed! however like visual depth perception, not everyone has it. The human ear has a load of bits that allow removing noise from the signal. (I don't have a block diagram, sorry!)
In theory one should be able to locate a noise in 3D. You can test this by getting someone to hide your phone and then ring it. if you have 3d sound perception you should be able to work out if the phone is behind/front/up/down.That forms part of the "steering" ability.
Then there is filtering the noises that you don't want. Music is can be a good test for this, how many instruments played on this track, what instruments were they, what were the lyrics, etc. Being able to do this requires that you be able to filter out noises that you don't like.
Again like all human senses, there are levels of ability, and in some cases can be improved with "exercise"
But, hearing what people are saying against a loud background is really really hard, so don't worry too much. Plus voices have specific human social encoding, so they can be affected disproportionally