Join Chris Nodder for an in-depth discussion in this video Benefits of paper prototyping, part of UX Design Techniques: Paper Prototyping.
Paper prototyping is a fast, cheap, flexible way of laying out your design ideas without being constrained by the tools that we typically use for interface design. It's fast to build paper prototypes, because you're not constrained by tools that take time to master. Anyone can build paper prototypes using just pen, paper, scissors, and some sticky notes. It's also fast to change the prototypes because it's easy to rearrange items on the page, rather than having to redraw the whole screen. Because it's so easy, you're more likely to do the rearranging and so learn more than you would if you were more hesitant to make changes.
Paper prototyping is cheap because it uses commonly accessible resources and takes very little time. Its flexibility lies in the way that it lets you combine interface elements on the page and reuse those same elements between pages. You'll find that users are very happy to give feedback, even if the interface looks like it was made by kindergarteners. In fact, maybe it's because it looks like the interface was made by kindergarteners. I found that participants are more honest when working with paper prototypes.
Maybe this is because it's obvious to them that the interface is not yet finalized. And so their input really stands a chance of making a difference and how the final product looks and behaves. Users are most often polite, and so if you show them a pixel perfect screen comp, they may not want to hurt your feelings. If instead you showed them these rough paper prototypes, they may even start rearranging elements and suggesting design alternatives for you.