Why did they hang the albatross around his (the ancient mariner's) neck.

The Mariner messed up big time. He did not heed the cardinal rule of the sea; DON'T SHOOT THE ALBATROSS! The mariner does and this act plunges the Mariner and his crew into a nautical hell. So, they hang the bird around the Mariner's head as a constant reminder to him that he is a major idiot and that he is the reason for their misfortune. The albatross around the neck is a common term. It denotes a mistake that plagues the person that made it.