This feature helps you in multiple ways. When this feature is enabled you will be notified with broken links in your website causing 404 errors which may effect performance of your website.
You can Always add a redirect to 404 link to fix the link.
There will be option to ignore certain file type.
Secondly it also notifies if someone is trying to hit non existent pages which creates 404 error.
SPY Notification send email alert whenever 404 is generated. 404 detection assumes that a user who hits a lot of 404 errors in a short period of time is scanning for something, if you think its fishy you can block the IP accordingly.