1.) Prototyping is building a base model from which modifications or later designs can be based.
2.) I think prototyping is important because it's a lot easier to modify a prototype than seventeen million release versions. It's a lot easier to get data out of a prototype as the original creator controls all aspects of it. Prototypes are also very good at demonstrating a simple concept from which later versions can be developed.
3.) Paper prototypes can be used to organize a digital game. A digital game can be expressed as a paper prototype very easily, although the complexity may be greater. The advantage of this is that modifications are easier to make and can be made on the fly without revamping the better part of the game. Also, it's a lot easier to focus on a part of the game rather than the game as a whole. This can in turn make the development process a lot easier and lead to a higher quality game.
4.) To streamline my development process, I'd very much approve of prototypes. They are brilliant at demonstrating concepts without excessive technicality. I also enjoy groups and collaboration, as a game that may seem great inside your head isn't always the best on a table.