[mathattack]

I agree with you that it's part psychological. I think another piece is an Agency problem. It may not be in the best interest of the people paying the bill (taxpayers) but it may still be in the interest of the organizer.

When Chicago tried to get the Olympics, it was to be the capstone of the legacy of Richard Daley. That's an agency problem, because ultimately the people of the city would need to foot the bills.

I view this similar to corporate M&A. It rarely ever suits the shareholders of the buyers. So why do companies do it? Either there is a psychological reason (overconfidence?) or their stock is overvalued or it might just be in the best interest of the CEO. CEOs of medium companies like to become CEOs of bigger companies. By extension, city officials like to wine and dine with the global elite.