So, basic context:

Clippy, full name Clippit, the smiling paperclip we all love to hate, was one of multiple Office Assistants available to users. He was not a Windows feature, but a Microsoft Office feature (as well as Publisher, Project, and FrontPage). He took the brunt of users' ire, rather than his friends, because he was the default and the others were not included in most standard Office installations; you had to reinsert your install CD to switch to them.

So why was he included? This video on the Internet Archive explains. The man speaking is Alan Cooper; he's the creator of Visual Basic, a Microsoft programming tool used to create Windows applications. He also wrote a best-selling book about computer UI design in 1995.

His answer is that research from Stanford at the time showed that when humans interacted with computers, they activated the same regions of their brain as they would when interacting with other humans (vs different regions for inanimate objects). Microsoft's designers decided that if this were true, putting a "human face" over the computer software would help make it even more relatable and less stressful for users.

This was not correct.

Clippy was removed because, simply put, everyone hated him. The Office Assistant feature was turned off by default in Office XP and Microsoft put up a joke website hosting Clippy's resume because he had been fired.

Today, Clippy lives on in the Windows 11 paperclip emoji.