pg's description of his day in Palo Alto is telling. I don't think he learned anything from these interactions, or if it ever led to any concrete action. But it helps sustain the idea that what you are doing matters, or could matter. That is the single biggest psychological stumbling block for the people I know who are in startups. There's this nagging sense that maybe they are just throwing all this time and effort away for nothing.
It's possible that the reason why other cities are "startup killers" is that this optimism is, to some extent, a shared delusion. If there were a town in the USA where all the lottery winners moved to, the people who also happened to be there would have completely different ideas about risk.
But the Bay Area is that town for internet startups. Although there are real benefits to moving here, I bet there's a strong delusion-enhancing component too. Which is good for VCs, but perhaps actually maladaptive for the individual startup founder or employee.
I didn't mean to suggest that no one realized it was helpful to be surrounded by a lot of people working on the same things. I've written about it a couple times myself. The surprises for me were in the details. E.g. that with startups, people are more willing to help out their peers than in more zero sum fields, and that you need that extra margin of help because startups fail by default.
"that with startups, people are more willing to help out their peers"
I'm going to guess that this happens in the entertainment industry as well. The similarity being that the person you are rooming with or working with who has a bit part on some show with you might be the next big star. So I would imagine people tend to be nice and helpful to people in any field where there is a big prize and it's not easy to tell (like with sports) who the next star or Spielberg might be. Because in addition to skill (which many have, as has been said with acting for example) there is luck and landing that key opportunity that launches your career. And if you happen to have known or have been friends with that successful person it could only help your career.
This is "economies of agglomeration", and it's basic urban economics. http://en.wikipedia.org/wiki/Economies_of_agglomeration