My dad has always loved The Lord of the Rings. All of Tolkien's writing, really, but especially dealings with Middle-earth. Of course, when I was old enough, he got me hooked as well. One of our favorite things is to read the appendices to The Return of the King. Those, along with the Silmarillion, The Unfinished Tales and other of his works, create a background for, and a history of, the worlds and characters that we enjoy so much.
This month, I started to create a history for the main character of my current work-in-progress at my advisor's urging. Now, I didn't create a Tolkien-like history. He came up with a history of an entire world, after all. What I did was create a series of vignettes that tell the history of my character and his family. Good times, bad times, and a bunch of things in between. This way, when I go through the story to revise or create new scenes to move the novel forward, I have a much better idea of how my character will act or feel because I now have a wealth of his past experiences to draw from.
We use our experiences to inform our decisions. Why shouldn't we do the same for our characters. It has been such a great experience that I honestly don't think I'll be able to write a story in the future without doing a character history exercise first. It's just better this way.