In the old days (the 90's and early 00's) it was fairly common to use paper prototypes of online or desktop applications. Producing full-scale interactive versions was relatively time-consuming.
However, prototyping tools arrived, existing tools matured, and UX practitioners learned how to produce more realistic and interactive representations of the products they wanted to test. To some extent, then, the use of paper prototypes diminished. At least, that was the case with my practice.
In developing mobile applications, there's something of a reprise of this trend; prototypes that run on mobile devices may take a little more time and effort to develop, and paper versions are again more common in my repertory.
(At this point, I should nod my head to my Frank Vetere at Melbourne University, who invited me to lecture recently on paper prototypes, and made me take take a slightly more critical look at this topic.)
In general, paper prototypes work well. Participants (the "test subjects") are willing to suspend their disbelief and pretend that a sheet of paper showing a screen, keypad, or whatever, is not just a representation, but the real thing. (Ceci est une pipe, if you like.)
I enjoy this type of prototyping, and it extends beyond the use of paper to represent screens. For example, when testing an interactive voice response and voice recognition system, we used a series of recorded announcements, and played them over a telephone connection at appropriate times to test an online banking application. Participants knew the system wasn't "real", but they behaved as though it was. (This is known as the "Wizard of Oz" technique.)
Recently, I've had reason to run tests with paper prototypes for iPad and iPhone applications. The purely paper form has limitations. In particular, it's not possible for users to explore interactive elements, and the facilitator has to expend significant energy in trying to explore how participants might activate various user interface components. It's difficult to tell whether touchable, draggable or swipe-able elements are recognised as such.
More recently, I was designing an application to run on an Android tablet, and created a very simple physical prototype as a proxy for the device. By cutting a piece of foam board to approximate a tablet device, and covering it with an acetate "screen", a reasonable facsimile of a tablet device is obtained. Screens can be swapped in and out as participants navigate through the application.
This is not by any means a new technique, but what struck me again was the sense of satisfaction expressed by participants in handling the "device". There was at times almost a delight in the physicality of the prototype. Participants were able to rotate it, play with it, and consider how it would fit in with other tools or devices, and the overall context of use.
The few minutes it took to convert a 2-dimensional paper prototype to a 3-dimensional model was well worth the effort in terms of the increased level of engagement it engendered.
If this simple technique piques your interest, I recommend you check out the book Sketching User Experiences: The Workbook, which contains a range of simple exercises you can use to develop your skills in this area.