Yes, real human heads. Originally invented for the religious purposes by the tribes in the northwestern region of the Amazon rain forest, morbidly curious Westerner collectors created a demand and market for the trophies.
The only tribes known to have shrunken human heads are of the Shuar, Achuar, Huambisa and Aguaruna tribes, all found in Ecuador and Peru.
The process of shrinking the heads were part of important rituals, originally having a religious significance; shrinking the head of an enemy was believed to harness the spirit of the captured enemy and compel him to serve the shrinker, in order to prevent the soul from avenging his death. The English term headhunting comes from this custom.
Removing the skull, bones and fat from the head, sewing the eyelids and boiling the flesh in water saturated with specific herbs, was the key process of creating the shrunken heads. About the legality and the whole process of shrunken heads, and where to buy a real one, Kirin Johnson from OdditiesBizarre has the rest of the story.
Fascinated by the rituals of these tribes, numerous movies and exhibitions were made in the western world, to satisfy people's need for everything unorthodox, and unusual.