When I write a story, which isn't as often as I would like, I try to make my characters as real as I possibly can. To do this I find it helpful to give them hopes and dreams, feelings, doubts, and sometimes even significant memories that have shaped them into the people they have become. I don't write down character fact sheets or bios, though that may help for the stories that I put down and come back to after a significant amount of time. Instead, I have made a habit of keeping these things in my mind as I write.
I suppose another way of saying it is that while back story can be good, there are a lot of details that should be known by the writer but left out of the writing. Think of it as a way to maintain continuity without overburdening the reader with details that may dampen the impact or flow of your writing.
Have you ever had a memory that seems so unreal that it could only be chalked up as a dream, yet so vivid that it remains almost impossible to believe it could have been anything other than reality? I remember being quite certain when I was around five years old that my older sister, younger brother, and I had sat down with our dad as he unwrapped the outer layer of a few double A batteries and smeared the uncovered "cheese" onto crackers for us to eat. Of course I realized a few years later that there was no possible way that we could have eaten battery cheese as we would have gotten a nasty taste of acid instead... but somehow the dream must have gotten miscategorized somehow in the ol' thinkbox.
Are there certain perceptions in our stories that can be altered slightly without lying to the reader and would this be of any real benefit to the tale? Trickery is a weak hand to play in most cases and it takes a real master to pull it off well. Make no mistake, I am not suggesting that we pursue such a ruse. What I'm talking about is the natural evolution of understanding. Seeing a situation in a predetermined light and then developing into a higher understanding is a demonstration of growth. It's a journey that starts out with our characters interpreting a set of variables based upon preconceived notions that may or may not have a basis of truth, and ends with a form of enlightenment, shedding light on the origin of those same notions. The hard part to that path is allowing your character to come to the realization without forcing them down the road, trust me -- your reader will notice.
Speaking of memories that seem a little unreal... I could swear I remember watching to very vivid movies as a child that I have never been able to find in my many hours of searching since. There is a chance that I just don't know what to search for, which is quite likely, but there is also the chance that perhaps they were only as real as the battery cheese spread across the saltine crackers.
The first movie was a lot like Willow in some regards. There is a perilous quest and members of the quest are given certain items to help them along the way. The ragtag group of adventurers set out and at some point they must cross a vast dessert wherein they find themselves hopelessly lost. After reaching the point of despair one of them (I think it was a boy) discovers that his gift might help them. He tosses the item into the sand and it zooms off into the distance, leaving them struggling to catch up as they follow in its wake. All I remember after that is them reaching some kind of cave and that they are able to move on with their adventure.
The next movie was actually quite entrancing -- so much so that I can't believe I could have possibly made it up. It involves a girl who walks through a mirror into a mystical world. The memory is foggy so I can't quite remember what happened afterward except that she discovered it wasn't what it had appeared to be at first. The only way to make it back into the real world was to eat a glowing fruit (a tomato I believe) from a magical plant that grew in a container not unlike the one that is depicted holding the rose in Beauty and the Beast.
So, if I were the character of a story, what could these memories, or faux memories as the case may be, lend to the story? In this case, perhaps our main character has a problem distinguishing reality from the mechanisms of his active imagination? Taking it a step further, what if our main character embarks upon a fantastical adventure where nothing is quite as it seems, only to slowly discover through each new twist a reoccurring self doubt stemming from an obviously false memory of eating cheese from a battery? If the center of these delusions is based in a mental hospital, it would not be unreasonable to be reminded of the memory by another patient explaining that they had heard once that batteries contained within them the most delectable of cheeses. This could further our main character's confusion, causing him to wonder if he had created the interaction with the other patient or if the encounter had been nothing more than another dream, a waking dream from which he could not escape. To adjust the flow of this story we could mix in sessions with the main character's therapist.
This has been an exaggeration of the concept, of course, but the premise remains. Our stories are about the interactions and growth of our characters. This journey generally alters the way our characters interact with or understand their surroundings. In this they are human, in this they are believable.