The anthropological approach is the first field research methodology that we think of when we hear the words "participant observation". To the degree that the observer of a group or situation is also a participant in the group or situation, then the research is defined accordingly as having used some type of participant observation methodology.
There is full immersion, where the observers live among the group or people that are being studied or investigated. The observer eats the food, follows the socialization processes, and demonstrates the values, ideals and norms of the group. Undercover law enforcement operatives are the ultimate participant observers when they convince those who are involved in criminal enterprises that the observer is one of them. There is partial immersion, where a journalistic observer of war will leave the safety of the hotel or secure part of town and go out as "embedded" with one side of the active military forces, or to walk among the people, catching interviews and witnessing events.
An anthropologist or sociologist will live among people for a brief or extended period of time in order to get a much fuller understanding of complex systems and interactions that go on in a society or group, including or specifically, any deviant behaviors that go on. The anthropologist might go in with no preconceives notions, while the sociologist may be trying to experiment by classifying activity, testing for relationships between variables, or conducting non experiments via the survey/interview method. A psychologist might be looking for the impact on the individual, or how the individual reacts to social processes. Psycho historians may be attempting to collect the individual experiences of those who encountered great and traumatic events in history.
The benefit of participant observation as a social science research method lies in developing an ability to develop enough trust to overhear conversations and to get people's perceptions of what is going on around them. The ability to access documents or information that would not be provided to an outsider can be priceless. The ability to ask questions that are more intrusive or detailed comes from working out as many issues of outsider distrust as possible. Surveys can be refined and made more relevant to what actually goes on when a clearer understanding of the people and their society is achieved.
The drawbacks of participant observation are clear. The interference of the participant in the observed setting or community, and the impact on the community on the observer, makes the observer the focus of the study, as personal, emotional, and other issues come to the fore, in some cases, to even introduce dishonesty, bias, or personal preference into what should be truly objective.
There is no doubt, however, that participant observation provides far richer and multidimensional information than other research methods.