It is a fundamental part of learning to take things in steps, where each step is a new achievement which must be recognized for the student to have a positive psychological reaction. The ultimate goal of all this belt stuff is to provide the best possible learning environment. Again, most adults don't need that positive reinforcement, but some do. And that's why they're in the school. A stripe on a child's belt is similar to a smiley face sticker that his 4th grade teacher put on his spelling test.
Martial arts have evolved so much over the years - no one can deny that.
And although many traditional aspects can be maintained, not all of them should be. Teaching methods need to evolve so people can give the best instruction possible to the students. Understanding the student both physically and mentally are equally important to quality instruction. With our increased academic education, we have a better understanding of the kinetics and anatomy of our bodies, this can help to enhance and better understand the physical techniques. Teachers don't teach the way they did just 20 years ago, and athletes don't train the way they did 20 years ago.