No, they don't. They go for guys that YOU think are ********. For the most part girls like confident, assertive guys who are attractive and treat them as equals rather than princesses. My boyfriend is literally the nicest guy I've ever met. I do, however, have a friend who is a "Nice Guy", who when he likes a girl obsesses over her and clings to the idea of her, and builds up this extreme image of her as perfection, and is convinced that he would treat her better than ANY other guy could, and he can't understand why she won't choose him because he does everything for her. Girls don't want this. The stereotype exists precisely because of this type of guy, who gets bitter and convinces himself that he is "too nice" so that he doesn't have to face up to any other defects. A lot of these "nice guys" are, in my experience, a bit creepy, and only befriend women because they're hoping to get into their pants. I have loads of male friends who are very nice, and they all do fine with respect to women.
NB: I'm not saying you're definitely one of these guys; it's possible you've just been unlucky. But of course women don't prefer *****. It's really crappy to blame your lack of success on a whole gender.
Not to mention what the other thread said about the friend zone myth ... if a girl finds you attractive, she won't not go out with you because you're her friend. Unless you're really, really close and she's worried about it.
EDIT: And the girl in your scenario didn't even choose this other guy over you - she doesn't even know you're interested.