How Capsaicin Works
Capsaicin is a colorless compound found in chili peppers that binds to TRPV1 receptors in your mouth. These receptors normally detect actual heat above 109 degrees Fahrenheit. When capsaicin attaches to them, it tricks your brain into thinking your mouth is burning, even though the food temperature is normal.
Your Brain's Response
When TRPV1 receptors are activated by capsaicin, they send pain signals to your brain. Your brain doesn't distinguish between real heat and capsaicin-triggered signals, so it interprets both the same way. This is why spicy food creates the sensation of heat and sometimes causes sweating, watery eyes, and a runny nose.
Why Milk Helps
Water doesn't relieve spicy food because capsaicin is not water-soluble. Milk, ice cream, and fatty foods work better because capsaicin dissolves in fat and oil. The fat in dairy products washes capsaicin away from your pain receptors, stopping the burning sensation more effectively than water.
Spice Levels and Tolerance
The Scoville Heat Unit scale measures how much capsaicin is in peppers, with bell peppers at zero and Carolina Reaper peppers above 2 million units. Over time, people who eat spicy food regularly develop tolerance because their pain receptors become less sensitive to capsaicin. This is why spicy food eaters can handle hotter peppers than others.
Capsaicin in Other Foods
Capsaicin is found primarily in chili peppers, but trace amounts exist in black pepper and other peppers. Different pepper varieties contain different amounts of capsaicin, which is why jalapeños are milder than habaneros. The heat comes from the pepper itself, not from cooking or seasoning. 
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