I'm of the opinion that people can adapt to less sleep. I spent quite a while sleeping exactly 6 hours per night, and then spent about 11 weeks alternating between 3 and 4.5 hours of sleep on weeknights and about 7.5 hours of sleep on weekends. This almost certainly wouldn't be a healthy thing to do for years on end, but for the 11 week period that I did this I felt pretty good (maybe 90-95% mental capacity) and was able to get a ton of stuff done with my ~20 hour days.
Again related to your post, this sparse sleep schedule was caused by college. I go to Caltech (for those who haven't heard of it, its probably pretty similar to MIT in terms of workload/intensity) and have a fairly typical sleep schedule among my peers. I'm pretty sure that every term (10 weeks) that I've been here I've had at least one 40+ hour period with 0 sleep, and had a term where I would sleep from about 7AM to 10AM every weekday (and then at least 10 hours/day on weekends). These longs hours are mostly caused by problem sets + studying, and things get a bit worse when you're actually too busy working to have time to go to class (which is a common occurrence).
As for why students do it, its to get everything done. Typical courseload is 5 courses/term, and starting in the middle of sophomore year most people are taking courses that would be intro graduate level courses at most institutions. 4 advanced math + 1 social studies/humanities course definitely keep you busy.
Also, among my group of peers, we typically define an "all-nighter" to be where you just complete the planned activities for the following day without any sleep at all. This generally involves staying awake from one morning (10AM) to dinner time on the next day (~5PM), making an all-nighter be ~30 hours. If an all-nighter were defined more leniently, we'd have a depressingly large number of all-nighters.
Note: Most of the above applies to my more difficult terms. I've also had terms where I slept 7+ hrs/night and maybe only worked until the sun rose about 2 or 3 times.