References are like "one-way" instances. Referenced objects are based on the original object, as are instances, and can also have their own unique modifiers. Any modification made to the original object is passed on to its references, but any modification made to a reference is not passed back to the original.
The one-way effect is useful, since you can maintain an original that will affect all its references, while the references themselves can take on individual characteristics.
If you are modeling heads, for example, you might want to keep a family resemblance in your characters. You could model basic features on the original, then model specifics on each reference.
In the modifier stack, a line of dashes separates the reference from its parent object, so you can see that the effect of modifiers on the reference will not affect the parent object or other references to it.