Why did Windows 95 setup use three operating systems?

Because, when they did it right, in Windows NT 3.51, the users with legacy 16 bit applications screamed. There was a 16-bit DOS compatibility box, but it wasn't bug-compatible with DOS.

Microsoft underestimated the inertia of the applications market. NT 3.51 was fine if you used it as a pure 32-bit operating system. You could even configure it without DOS compatibility. Few did.

> when they did it right, in Windows NT 3.51, the users with legacy 16 bit applications screamed

I mean, i don't think there is anything "right" involved from the users' perspective when all they get is the programs they want to use their computer with becoming broken :-P.

In general people do not use computers for the sake of their noise nor OSes for the sake of clicking around (subjectively) pretty bitmaps, they use computers and OSes to run the programs they want, anything beneath the programs are a means not an end.

(and often the programs themselves aren't an end either - though exceptions, like entertainment software/games, do exist - but a means too, after all people don't use -say- Word to click on the (subjectively again) pretty icons, they use it to write documents)

>anything beneath the programs are a means not an end.

This.

Absolute backwards compatibility is why Windows (particularly Win32) and x86 continue to dominate the desktop market. Users want to run their software and get stuff done, and they aren't taking "your software is too old" for an answer.