Why does it happen? My first answer, it’s dur to felting which happens mostly with sorts of wool that have a hairs with a scaled surface. Felting (when producing felt) is done by moisturing, heating and heavy agitation, so that the scales interlock at a compressed state and then stay that way.

Search turns up several ways of shrinkage though, for different types of fiber: felting, relaxation, consolidation, and contraction. Interesting to read --> Why Do Clothes Shrink in the Wash?