Earlier quoted context omitted.
You need to enter your password when downloading a free app so that if someone finds your phone they can’t install a malicious hacking or key logging app on to your phone. Installing apps is a security risk, not just a financial issue.
If someone finds my phone, it'll be locked and they won't be able to install anything. If they can unlock the phone then it's already game over for me.
They have your lock screen password but not your iTunes password.
You thought they were a friend and let them borrow your unlocked phone.
Even for a security conscience person there are plenty of situations where someone could get your unlocked phone.
And most people aren’t security conscience. It’s to protect them, not you.