Last time I tried Arch (about a decade ago), I gave a command to update packages. In the update, my NVIDIA card was moved to be supported by "nvidia-legacy" rather than "nvidia"... Of course, I didn't have legacy drivers installed, so the driver failed pretty badly (it was assigned to NVIDIA in my xorg conf). X wouldn't load, and because several aspects of X changed in the update, I had to spend a few hours figuring out what when wrong.
The point of the above (possibly out of date) story is that when I say "update", I want a minimal chance that something serious changed. I don't mind fiddling around with Linux, but I want it to be on my terms (like a lazy Sunday). Giving the user a choice between "update" and "upgrade" allows me to specify when I want to apply major changes.