Shell sort is a sorting algorithm created by Donald Shell in 1959 that improves on insertion sort. It works by comparing elements that are farther apart within the list rather than just adjacent elements. It performs multiple passes over the list, each with a larger increment, sorting subsets of the elements. Shell sort is more efficient than bubble sort and faster than plain insertion sort, with its main advantage being for medium sized lists. The choice of increments can impact its performance and potential issues arise if the increments are not relatively prime.