I have never been fooled into believing that my screen is larger than it really is just by sitting closer. Although you may fill the same field-of-vision as a larger screen that way, your eyes have to focus on a nearer plane and your brain automatically compensates for that to calculate the size.
With that said, there are legitimate reasons for choosing to install a smaller screen, such as increased brightness and contrast, less visibility of artifacts, etc. Your ideal screen size will have to hit a sweet spot between a large immersive size and just plain good picture quality. You often have to compromise on one to get the other.
I totally agree Josh. You just get a brighter, punchier, denser and often perceptually (and sometimes objectively) better contrast the smaller you make your projected image in a room. That's why I often watch at smaller sizes and I can totally see someone opting for a smaller size to retain those attributes, and moving closer to their screen if they want greater immersion.
Though I watch all sizes, I've found with my RS55 and ST-130 1.3 gain screen, that 112" wide is a sweet spot for scope films, in that it feels really large and immersive, but also retains some nice density, sharpness, contrast and punch to the image. (Those latter attributes of course increase as I go down to 109" wide, 105" wide or 99" wide). I sometimes watch scope up to 125" wide and on really good clear transfers it can still look excellent, but I do notice what I'm sacrificing most of the time when I opt for the larger image.