The homunculus argument is a fallacy arising most commonly in the theory of vision. One may explain (human) vision by noting that light from the outside world forms an image on the retinas in the eyes and something (or someone) in the brain looks at these images as if they are images on a movie screen (this theory of vision is sometimes termed the theory of the Cartesian Theater: it is most associated, nowadays, with the psychologist David Marr). The question arises as to the nature of this internal viewer. The assumption here is that there is a 'little man' or 'homunculus' inside the brain 'looking at' the movie.
The reason why this is a fallacy may be understood by asking how the homunculus 'sees' the internal movie. The obvious answer is that there is another homunculus inside the first homunculus's 'head' or 'brain' looking at this 'movie'. But how does this homunculus see the 'outside world'? In order to answer this, we are forced to posit another homunculus inside this other homunculus's head and so forth. In other words, we are in a situation of infinite regress. The problem with the homunculus argument is that it tries to account for a phenomenon in terms of the very phenomenon that it is supposed to explain.
Another example is with cognitivist theories that argue that the human brain uses 'rules' to carry out operations (these rules often conceptualised as being like the algorithms of a computer program). For example, in his work of the '50s, '60s and '70s Noam Chomsky argued that (in the words of one of his books) human beings use Rules and Representations (or to be more specific, rules acting on representations) in order to cognate (more recently Chomsky has abandoned this view: c.f. the Minimalist Program).