I've tossed this issue over in my head a few times, and to be honest I still don't know. The "blocking of sound" issue can be abated by adjusting the volume setting on the headphones. It isn't really a problem. In the past I've been more concerned with the distraction factor. However, when I was in Hobart last year someone I was riding with pointed out that music can actually reduce the impact of other distractions such as malicious horns, magpies, morons yelling out car windows, etc etc. So in answer to the question at the top of this thread, I really don't know. Maybe try it out for yourself on a short ride and see.
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I am clinically insane. I am proud of it.
That is all.