i went to a tibetan exhibit at a museum on thurs and was wondering the same thing. not sure if this answer satisfies me, but it's the best i could come up with after 5 min of searching:
Immediately after the death of the Dalai Lama, a group of high-ranking monks set out to find the one chosen to be his reincarnation. Every mother who is pregnant at the time of the Dalai Lama?s death hopes that she will bear the son that will be chosen as the next Dalai Lama. The use of oracles, visions, and signs, will help determine who the new Dalai Lama will be. The Regent of Tibet goes to the sacred lake of Lhamo Lhatso at Chokhorgyal, about 90 miles south east of Lhasa. For centuries, the Tibetans had observed that visions of the future could be seen in this lake.
When the right person is found, he must pass a series of test to prove that he is the true reincarnation, including choosing items used by the previous Dalai Lama from a montage of items some real and some counterfeit. He must also possess all the correct physical characteristics, including long ears, moles in the right places on his torso, and two vestigial bits of skin at the shoulder blades, indicating the two other arms possessed by the Bodhisattva (biography from Nobel Prize Winners).
Once the new Dalai Lama is chosen, he must move to Lhasa where he begins his studies. This trip to Lhasa is a long processional, with many stops. In every village and town passed, the Dalai Lama encounters processions of lamas and monks carrying emblems and decorations. The people of the towns also join in the processionals. Along the way, high-ranking officials, such as prime ministers, and members of the cabinet, will receive the Dalai Lama (My land and My People). Once the processional is completed, and the Dalai Lama has reached Lhasa, there will ceremonies to welcome him and give thanks for finding him
(from
http://www.uwec.edu/greider/Chinese.Japan/student.web.pages/Modernity%20and%20Spirituality/RebeccaKelm/immediately_after_the_death_of_t.htm )