Maybe this should be an enhancement request then. I don't want to touch
my hard disk. And if the live CD ISO can boot from a USB stick, why
can't Ubuntu itself not launch from an USB stick?

Also, if it is not supported, why can I select this option in the
installer as if it is supported?

Other people seem to have been successful with installing the boot loader on 
the USB stick in the past:
https://askubuntu.com/questions/170454/can-i-install-ubuntu-to-my-32-gb-usb-pen-drive

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https://bugs.launchpad.net/bugs/1012521

Title:
  Installer Crashed while trying to install grub on /dev/sdb (usb memory
  stick which live installation CD)

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