I can understand this, but when NPCs (besides Guards, etc,) run up to a Dragon and try carving its eyes out with butter knives, I beg to differ.
Just because NPCs would be running away would not mean that they're not going to be killed. There would still be casualties unless we had a Fail Dragon.
Well, you are saying that you want a better AI. I cannot disagree, but there are also limits to what Bethesda can do right now. The AI will be better with the next game, and the next, and so on. It keeps improving and it has gotten better compared to the previous games. Perhaps try to see it as a progression - it is never perfect but only gets better with each game.
You can also take a closer look at the NPCs' reactions. I do not find them too unrealistic. If people, even today, would always react as they *should* (and not as they do) then we had a lot less problems in the world... They are only common folk, they are not dragonborn. They are living in a harsh world and some choose to die fighting, others beg for mercy and die just the same. If they all ran and hid then it would be certainly smart of them, but if they were this smart then they could have build ballistas, too, and just shot the dragons themselves. It rather seems that many of the people in Skyrim are still in disbelieve over the return of dragons and they act stunned when they encounter an attack. So their dumb behaviour is not too far off from reality.