I think the "making people look stupid" argument is attractively simple and cynical, but not the whole story. Another attraction is thinking that these people are really experiencing emotions. As a human being I want to empathize with them if I believe they are real. At least, that's how I felt when watching Real World London.
This aspect of reality TV is quashed partially by the meta-action of the new shows. Increasingly the participants are acting, so the only real displays of emotions are their devastation at losing or being humiliated. Which then links this theory back to the "making people look stupid" angle. That's the only opportunity on the new shows to see real feelings.
