If it is anything like Fallout or the previous Elder Scroll games, the NPCs that walk around town, give you quests, and often remark on how they're too weak to do those things themselves just have a flag in their AI that says what they are hostile too. If a dragon shows up, or the player steals a breadknife and is spotted, the entire town population starts fighting with the same AI routines and animations as the biggest badass soldiers you fight with.
It's not an uncommon problem. In the new Deus Ex, you can use the takedown moves on anyone, and some of the animations involve Adam blocking high level martial arts moves from the target as part of the takedown. So you end up with wrinkly old ladies doing a roundhouse kick. Smaller groups of bandits in Mount and Blade run away from you, but if caught will try to demand gold from you in exchange for your life. And they will charge you happily on the battlemap (though later games do make them run if they are losing the battle. But they start with a spirited attack.)
Untill a dev team has so much money to blow that they create separate AI routines and animations for all kinds of NPCs, we'll be stuck with either this or NPCs that can only cower in a corner while a dragon is om-nom-noming their kids.