Lars from all the audience could tell was living in a world that was exactly as our own.
The fact that it contained fictional characters suggested that it was not exactly like our own world. In the context of the world of these fictional characters, maybe their reactions were realistic to the world that was created just for them. Also, in context this was behavior consistent with mental illness...all similarities to the "real" world, our world, are made so that the story will be relatable to the audience.
This is not to discount your opinion or anyone else's opinion on the film or to suggest that their viewing experience is invalid. Just to offer a different
perspective...
Another perspective is that people in small towns often behave in ways that seem strange and their reactions are to various things are askew from others. Case in point, Point Pleasant, WV...it isn't necessarily "fringe" behavior to believe in a "Mothman" or various towns in the Pacific North West that believe in Bigfoot...
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