There are various items in game that can be used to disguise yourself. When you are disguised you will show up in room descriptions as something along the lines of 'a shrouded short man' or 'an average girl'. This is an indicator to everyone who encounters your character that she is wearing something that covers some or all of her features.
Disguising material (such as shrouds, ponchos, helmets) does not in and of itself prevent someone from recognizing you. If you want your disguise to be effective you are encouraged to make sure as much of your body is covered as possible. Your face may not be visible but the giant purple unicorn you have tattooed on your right hand might be.
Simply throwing on a helmet does not magically make everyone in the room, or anyone who has met you and seen what you are wearing or how you talk forget who you are.
Disguise is in and of itself a skill, and you should roleplay that skill accordingly. This is enforced with disguising material by making your disguise 'slip' over time. The more you talk, move, and interact with the world while disguised, the larger chance that your disguise will slip and your character 'name' will be visible in the room again. The IC justification for this is that your character has (unintentionally no doubt) revealed something. It is then in the hands of any other characters who interact with yours, to decide if they recognize you or not.
Players who wish to effectively utilize disguising material should be changing their @shortdesc, @describe, clothing, @voice and @Look_place. This can be quickly automated with @macros, should you find yourself having to keep track of two description sets regularly. If you are disguised and someone still recognizes you because you did not change your @voice, that is fair game! You should strive to not only disguise yourself from the other character, but also the other player! If they can't OOCly guess who you are via meta cues such as recognizing your @describe, you have won half the battle. It is inappropriate for a player to use OOC knowledge such as recognizing an @describe, in character, as a means of identifying you. However, it is a lot more fun all around if the player doesn't have to pretend not to know who you are ICly.
On the flip side, just because you can see a players name does not automatically mean your character recognizes that person. They might still be wearing a helmet, still be wearing a shroud, or you might only have met them in passing. Please roleplay this accordingly! Check character descriptions before you jump right in to 'Hey Bob! Good to see you ole buddy ole pal!'