The simple answer is because they were sure it was the right thing to do.
The slightly more complex answer is that:
they decided to build their own architecture rather than leverage more standard architectures, and as a result arguably immediately raised development and production costs, as well as ensuring something trickier for developers to use - something MS to an extent piggy backed, so it is worth noting before overly slamming Sony decision here that the research also paved the way for 360 architecture.
they decided to include BR. I understand why, and as I only wanted an HD console with HD physical media playback for me it was the right choice, but for the majority this wasn't the case at launch and clearly the BR inclusion massively raised the costs plus the launch price
they went for prestige, with a powerful console that was quieter and more reliable, but again this raised costs which inevitably got passed into the price
Of these and many other decisions were clearly made with the confidence of a long run of market dominance behind them, and a lot of confidence that Nintendo weren't a concern while MS were more of a threat and their focus on high end graphics and online for Western audiences had to be countered.
No big company wants to make bad or poor decisions, and hindsight is as they say cheap. They made their choices, I don't think any were bad choices as such, but they simply didn't land well with the market at that time, nor with how their competitors had responded, Nintendo with something disruptive, and MS with a fast launch and push to get a relatively comparable console to market first and at a lower price.
Try to be reasonable... its easier than you think...
