The first theory, often known as "Theory Theory," basically states that people develop their everyday knowledge of the world using the same mental strategies that adults use in science. That is, they make up theories. These theories enable young children to make predictions about new evidence, to interpret evidence, and to explain evidence. So, the first time I see my friend looking downward, with a frown on her face, I might initially think she is happy – that would be my first theory about her. However, after a few times when I am proven wrong, I will know this posture probably means she is sad.
The second theory is often called "Simulation Theory." It essentially says that when we want to understand what someone else is doing, thinking, or feeling, our mind simulates, or recreates, the same actions, as if we were doing them ourselves. From that simulation, the mind figures out what the other person might be feeling. So, if I see my friend looking downward, with a frown on her face, my mind simulates these actions. From that simulation, I understand that when I sit like this, I am generally sad, so I decide that my friend is probably sad too.

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Go to source: https://kids.frontiersin.org/article/10.3389/frym.2016.00018