There's a driving version too. "Maybe the person in that car is going to their neice's house for a dinner and they're not happy because they hate her." Or "Maybe that person is driving home from a long day at work and can't wait to see their dog."
Sometimes when I'm out and about I think about people. Not so much people-watching in the present as it is wondering where they've been. That old man over there--what was it like for him growing up? Did he have a lot of friends he got into shenanigans with? What kind of job does he have? Maybe he moved here from Iowa or someplace else? Is he married or does he have kids? Kinda like making up a backstory for them.
I've done the self-centered version of this -- I imagine some kind of movie-style event bringing me and the person together, and me getting to know them in the context of that situation. Happens a lot on elevators, buses, and train cars.