No highlight recovery for you Leica M-Monochrom!
I never asked the question, "How does highlight recovery work?" or "How does Camera RAW know what lies outside the histogram?"
It wasn't until I was reading up on the Leica M-Monochrom that I learned that highlight recovery comes from getting data from one of the other channels that aren't blown out.
Silly me. I should have known.
From the M-Monochrom preview on dpreview.com:
There are drawbacks, of course - the 'headroom' found in Raw files comes mainly from the fact that bright regions have usually only over-exposed one of the three color channels, with usable data still available for the other two channels. With a true mono sensor, any overexposure is absolute - once the channel has clipped to white, there's no chance of recovery. Equally, anyone who has got used to producing mono images by converting color images, with all the selective color mixing that brings, will have to get used to pulling the correct color filter out of their camera bag at the point of capture.
This also explains why recovered highlights don't always look "optimal" sometimes there's still something muddy about the detail recovered especially when 2 channels are blown. And apparently not all cameras are created equal in their ability to recover highlights. Read this for more in-depth explanation on how highlight recovery works.