Because the payoff depends on the highest or lowest price over the period, not only on the price at expiry, it is a path-dependent option. With discrete observation, prices are observed only on dates set in the contract, so highs and lows between observation dates do not enter the payoff. With continuous observation, prices are watched at all times.
This is a different meaning from "lookback" in interest rates, a convention in compounding in arrears that uses the rate from a number of business days earlier.