My question is not why musicians often produce better recorded works than their live performances. The question is why are the flawed acoustics of a venue far less acceptable on a recording than in person? Binaural microphones do an ok job of capturing direction but when played back on normal headphones, the obviousness of poor room acoustics are still apparent. My thinking is that the shape of the ears, the audio processing of the brain, and the multitude of acoustic nerves can somehow untangle the acoustics of a room and make everything sound much clearer for the in person listener. How can this be achieved with technology? I'm not so much interested in holophonic sound as I am in clear sound.
You have two ears with a rather complex shape. If you want to get a clearer picture of an auditory scene, you can turn your head to a position where signals on both of your ears are most strongly differentiated from sources in their vicinity when coming from the position you are most interested in, with your eyes providing additional information for making sense of what your hearing tries to discriminate on.
This layered complexity that you can explore with your hearing is not there in a recording. You have something like 2 to 5 channels for reproducing a soundscape and they do not react to movements of your head.
Like human vision, the resolution available to hearing at a single point of time is lacklustre compared to what technology can consistently reproduce, but since you can tune in to what is of interest, you'll still find that recordings will not keep up with what a keen mind can track in the original. The big picture is a lot fuller than what human memories could reproduce, but it does not hold up to digging into small details like reality does.
I'll try to present a personal armchair-psychological view on this, not talking about auditory systems, nerves, biological physics and other stuff of which I know practically nothing. But I know what it feels like to be me, so that should count for something.
why are the flawed acoustics of a venue far less acceptable on a recording than in person
This is a good question. IMO, almost anything played "in real life", in the same physical space where I am myself, by actual real people I can connect with, has a bigger emotional impact than almost any recording that can be reproduced through loudspeakers. The finest thing I've heard coming from loudspeakers was a really great tenor sax player, being recorded with a large-diaphragm studio mic, monitored with big studio speakers. I think that was a fine experience partly because I knew the guy was on the other side of the wall a few meters away. But to hear a real piano, real flute, real strings, real brass instruments, vibrating in the same room, nothing compares to that.
Why can't a computer algorithm reproduce the same emotional impact? Can an algorithm place the player and instrument in the same physical space as the listener? AFAIK, some sort of loudspeakers would need to be used, which tend to sound like loudspeakers, i.e. fake, never real. Even the finest and most expensive loudspeaker-based digital pianos sound fake, like listening to radio.
If you try to do it the other way around, placing the listener in another space, it's fake too, like virtual reality 3D glasses. I experience some sort of an illusion, but ultimately, I am not there.
However, if the actual instrument contains a loudspeaker, you can reproduce it! If the instrument to be placed in the same room is a radio, then you can entirely realistically reproduce it by having an actual radio in the room. If the instrument is played through a guitar amp, you can reproduce it by having a guitar amp in the room. Then it will really sound like a real instrument in the room. Granted, the player won't be able to react to you, so it's still less real anyway.
Music is better when it's experienced together with people. Sing and dance together in the same space. A recording of it, however realistic and hi-fi, is still only a recording.
It's a complicated topic, and the variables involved alone would keep a panel of musicians and audio technicians busy debating for a week.
I would like to offer that sound quality and life-like sonic pleasantness are highly subjective, and that which sounds great to one person may or may not be as pleasing (yet alone emotion-stirring) to another listener.
I will say this much; From the standpoint of human psychology, the experience of listening to a band or duo or orchestra live and in-person carries with it a Pandora's Box of human nuances, influences, and possibilities. Visual stimuli. Emotional response to things both heard and witnessed. The mood that the listener was in when first seated at the performance hall. Where the music took the listener, emotionally, from there. Personal connections to the musicians, or not.
I guess what I am saying is that a truly objective measure of sound quality and 'life-like' quality renditions would almost HAVE to involve removing the humans from the evaluation equation. Computers, sophisticated oscilloscopes, etc, etc.