Dithering is about spreading errors out, so that they aren’t related to the sampled signal. A constant background hiss is easier to ignore than tones that change depending on signal frequencies and amplitude.
Here’s a fixed-frequency sine wave, truncated to seven bits:
Here’s the same signal dithered, truncated to seven bits:
Notice the problems with the non-dithered example, especially in the tail as the signal fades out and fewer bits are used.
Here’s a swept sine wave, first simply truncated to seven bits:
And again dithered:
Note the aliased frequencies in the non-dithered sweep, and how the tail sounds like a square wave as it fades out.
In both cases, the dithered signal maintains the sine tone throughout, at the expensive of added “hiss”.
There are things we can do to make the hiss less obtrusive, but of course at the more normal 16-bit sample size, the dither-noise level is far lower than these extreme examples.
Read the EarLevel article on dither.