Jobs understood that stylus was a psychological barrier, additional interface between user and screen.
Direct touch gave the biofeedback needed to make operating the device personal. Your touch makes things happen, rather than you touching it with an 8 inch pole.
It seems an irrelevant detail to a logical mind but this was key element to iPhone's success.
There is this good PBS documentary on psychology of marketing. If you don't have the time for the whole thing, fast forward to 0:48 and watch for one minute—it is very representative of the marketing mindset I am talking about.