Jules, I grew up in the South in the 60s -- there were rules for EVERYTHING in that time and place. I don't know why "it's better to be underdressed than overdressed" was one of the few that stuck with me - most likely because it reflects what I prefer anyway.
At the time, I think there were a couple of reasons for the preference. One was that there was no cheap clothing in that era -- if you could afford to own fancier clothing at all, you were well off. So there was an element of "showing off" if you dressed in a way that others couldn't afford.
Secondly, the world was changing pretty rapidly then and more formal attire was beginning to be associated with being old-fashioned. (Remember Jackie Kennedy causing a sensation by going to church in a cotton dress and sandals?) So, if a woman went to bridge club wearing a dress when everyone else was in capri pants, she risked looking like a fuddy-duddy. But if she was the only one in pants, she could more easily characterize the "mistake" as "being modern".
Adorkable, I, too, am sorry you were made to feel awkward during a job interview -- a situation that is quite stressful enough!! That is absolutely a time when it is unquestionably better (in fact, I think expected) for one to be pretty formally dressed.
Ingunn, I was really taken with your comment that you'd prefer to be "overdressed in an understated manner." Upon reading that my immediate thought was "And I'd rather be tastefully underdressed." Maybe they are two sides of the same coin - we take the silhouettes and styles that we prefer and find ways to make them appropriate for different situations?