Fellow student seems to be chasing rainbows. Should I step in?

Which kind of interaction, if any, is ethical and reasonable for me to engage in?

Discuss your concerns with your peer.

How are similar problems usually handled in academia?

Through discussion.

Are people like my fellow student...left alone to their own judgement,

Largely, yes, but...

or do co-academics talk them out of seemingly bad ideas?

...in an ideal world colleagues (who they've discussed their work with) will try to bring them back on track.

Do people criticize each others' research a lot?

Yes! Constructive criticism is central to the research process (unconstructive criticism is unfortunately common).

It seems your main concern about your colleague's research is that the results are not "useful". I'm not sure what it means to you that the results aren't "useful" - is your colleague doing something that hasn't been tried before? If so, the work may be "useful" even if only to rule out a particular approach, or to clarify problems with a particular approach.

For example: suppose I have an idea to use X to address problem Y. It turns out that the state of the art, Z, is a much more efficient and closer to optimal solution to Y than X. However, by trying out X, I at least am able to 1) rule out the approach, and 2) gain some insight into why X does not work as well as Z for problem Y, what features of problem Y suggest it is not amenable to solution by X, etc. These are "useful" results (especially in the context of a bachelor's thesis).

Now, suppose I have a colleague who is in this situation, but who is still trying to somehow make X into a good (or better than Z) solution for Y. I would probably (in the course of normal discussions about our research) say something to my colleague like, "I think the most interesting part of your research is what it teaches us about problem Y, why X initially seemed like a good solution, and why Z turns out to be much better than X. If I were in your position, I would focus on that aspect as my main contribution, especially with a thesis deadline coming up." Often, people are so close to their research (whether their results are promising or not) that they may not realize what parts of it could be most interesting to the broader research community. This kind of feedback (from anyone - supervisor or colleague!) can be helpful.

I would, gently, make your point known. Make it clear your point is in sympathy for him, not in directing him or arguing with him. Perhaps it will help the fellow. Perhaps not. If he doesn't want to listen, back off and just let the guy take his lesson. But I would probably go ahead and give him the heads up. At least he can consider the issue.

P.s. I think your instincts are good here. Project selection (reasonable scope, available resources, etc.) is a key to success in research. Just "doing what the advisor suggests" is not independent. You always have to decide if it is a good idea to work on a project someone suggests. Time is finite. Life is finite.