Mountain Wolf, I've thought about similar things myself. Sometimes I wonder if we somehow keep someone's memory so alive that we convince children that the deceased person is still around.
However, I know that children do indeed see things that we don't. I've seen my own nephew react to things that I could not see, and I observed him when he was smaller when we would go to cemetaries. He would often go toward the tombstones of children and act like he was playing with someone the rest of us could not see.
My own little one, who is 21 months has done similar things. My father passed away just as we were starting the adoption process, but he had been very excited for us. After we got Brianna, my mother passed away just a month after. I have a very bittersweet memory of my mother, laying on a hospital bed in the last days of her life, holding my baby and uttering terms of endearment in cajun French.
My baby will never know either of the grandparents who loved her so much. However, when she sees a picture of my father, she babbles gleefully and points to him. She has done this almost from the moment we brought her home. Brianna spent the first nine months of her life in a Chinese orphanage and I would like to think that Dad watched over her during that time. She also occasionally babbles sweetly in the mornings, seeming to carry on a conversation with someone I cannot see.
Whether Brianna knows my father from the spirit world, or because of my trying to keep his memory alive with old pictures and talking about he and my mother, I'm not sure. I do feel that both my parents are somehow watching over my daughter and I and she definitely reacts to something.