Human Psychology and its Effect on Myths, Legends, and Superstition
Many myths and superstitions can be traced back to man's early fears, his natural curiosity, and his desire to explain and understand the unknown.
Human survival instinct tends to make people wary of things that might be dangerous. Animals that might feed on humans, insects and snakes that might have toxic bites, environments where these creatures might be found, and even other humans (especially those from other racial groups) are all things that we're programmed to be careful about. You're undoubtedly aware with a natural tendancy for people to be afraid of the dark; this makes perfect sense if you consider that many predators are noctournal, and quite frankly, people can't see to get around as well in the dark. Thus, it's only natural for the dark to be frightening.
Generally speaking, when humans face the unknown, their primary instinct is to play it safe and distrust it. After all, if the human race was naturally inclined to go out hugging every strange animal they came across, we wouldn't have lasted very long after a few encounters with creatures like crocodiles, bears, or mountain goats.
Although it may seem backward to initially distrust other humans, there is - or at least was a perfectly good reason for it. The people closest to you (your family and/or friends) are probably the people you're most inclined to trust. (Even if you don't get on with them all the time.) You know them, you're familiar about them, and they may have their problems, but overall they're probably not too threatening. Since people prefer safe, familiar territory, they're more likely to instinctively associate with people who remind them in some way of those they are familiar with. The less familiar someone else appears, the more likely they are to be perceived as a potential threat. In the past, other tribes might be competition for food and living space. Long story short, the ones who looked like your family were more likely to be from your tribe - the friendly one.
In short, the primitive world was a frightening place, fraught with dangers and mysteries of every kind.
Now, humans like explanation. They like to know. They're curious creatures, poking their noses here and there, trying to make some kind of sense of their surroundings.
When they can't get a definitive answer otherwise, they tend to start doing a little hypothesizing of their own, which can vary in accuracy depending on their pre-existing knowledge of the world around them.
If knowledge is power, then believing you have knowledge likewise makes you believe you have power - and humans would like to at least believe they have power, as it makes them feel less anxious about what's around them.
Any sapient species would likely be the same, since advanced logic and reasoning skills tend to go with the territory. (Yes, "the great lobster Grorg makes it dark at night by putting out the sun with his tail" would be advanced logic, as silly as it may sound to us.)
And then there's the huge third factor in the equation: false observation. A human who dropped threw a rock in the ocean right when a thunderclap occurred might be inclined to believe that the action of throwing the rock into the water actually caused the thunderclap. Or they might see a large animal with birds on its back and rationalize that small plants growing on the animal were producing seeds that the birds were eating, rather than that the birds eating parasitical insects.
The last factor is the simple fact that most humans enjoy positive attention and being paid attention to. By telling stories, they can hold large amounts of people in rapt attention, from wide-eyed children listening in awe to the hunter tired from his last excursion. By embellishing details, the storyteller can further ensure that the story will keep the audience listening. After many generations of beefing up the story a bit here and there, along with a few misremembered details, a fantastic legend is born.
How do all these factors help myths and legends take shape?
Consider the animals the Western culture has looked down upon - bats, for example. Darkness frightens humans, and bats, being noctournal creatures, become associated with darkness. Also, their being the only true-flying mammal makes them even more strange. To the primitive eye, they are some strange combination of familiar daytime creatures such as mice and birds, but are neither.
The bat, feared because of its seemingly paradoxal appearance and association with the night, has been borrowed upon by artists depicting fearsome creatures such as demons - often shown with features such as a bat's wings, horns, and a tail. (The horns being a feature borrowed from potentially dangerous/aggressive animals such as oxen, goats, etc.) This image has become so ingrained into our imaginations that if you asked almost anyone what a demon looked like, you'd probably end up with a very similar description.
On the other hand, things that are associated with good are often depicted with less-fearsome features. The phoenix is an exceptionally beautiful bird. Pegasus has feathered wings.
Of course, positive figures can also have features from 'dangerous' animals. It all comes down to what a certain group fears or admires. Although many predators are dangerous, humans admire them for their strengths. Thus, a god of strength or combat may be depicted as having the mane of a lion. Because the owl was believed to be wise, the Greek goddess Athena, associated with wisdom, was depicted with a pet owl.
Depending on the culture, humans can fear or admire a wide variety of things. Water is one such thing. It's necessary for survival, but at the same time, you can also drown in it. In places where drowning presents a very real danger, the local cultures often have legends of creatures that live in the water waiting to pounce on unsuspecting victims and drown them. In places where water is scarce, a spirit associated with water might be a more welcome entity. People who live in a place where rockslides were frequent might be inclined to think that goblins lived at the tops of mountains pushing on the rocks. Large rocks in more stable positions might be considered to be the homes of friendlier spirits.
Also, legends are quite mobile. If a group of people terrorized by falling rocks moved to a place where large stones were sitting in the ground without bothering anyone, they might still harbor fears toward the stones, perhaps thinking that those nasty goblins are waiting to push more stones on them. After a few generations, they might forget exactly why they don't like the stones; as far as they're concerned, they're just 'unlucky.'
Myths and legends can also be formed to help abate fears. Although the Greeks believed there were malevolent entities living in the sea, they also believed the sea was home to the Nereids, divine women who were helpful to sailors. Some native Americans wove dream catchers to keep themselves free from bad dreams. Many people wore (and still wear) small trinkets with symbols or objects associated with positive figures to ward away negative influences.
Myths are cumulative; new ideas often build and expand upon old ones. If a group of people moved into an abandoned area where a previous culture had left behind some kind of structures, they might form the belief that these structures were left behind by a supernatural entity of their own culture, especially if the means to produce something similar was beyond their comprehension. The natural human tendancy toward distrust would probably make them more likely to believe that it was left by a negative force than a positive one.
By the way, remember the rock and the ocean? People might start putting two and two together and decide that if throwing the rock into the ocean makes thunder, then they must be making the sea-spirits angry.
Also, legends with similar motifs can eventually merge. A real-life example of this is the legend of Excalibur. Many people mistakenly believe that Excalibur was the sword pulled from the stone, although originally, it was acquired by King Arthur much later as a gift from the Lady of the Lake. Likewise, other legends involving similar items or themes can get tangled up and merged. Two charms to ward off evil might get combined by someone wanting to make sure it worked. Or, after hearing a stranger's tale about a legendary warrior, another culture may retell the story, but replace the warrior with a hero from their own stories.
Myths often have several variations apiece. Many folk charms often vary in complexity and detail - and in some cases are contradictory. For example, some maintain that a lucky rabbit's foot must come from a rabbit shot under the full moon, while others believe it must come from a rabbit shot under the new moon. There are dozens of Cinderella stories all over the world, each one tailored to fit the place from which it came.
Another thing about myths is that they're remarkably persistant. Even in our time, when science and reason have largely overcome many superstitions, you'll still find that some people carry objects they consider to be lucky. Perhaps people don't entirely believe in their power, but perhaps even the thought that an object is considered lucky - wishful thinking, if you will - has a positive psychological effect. Although we now know that unicorns were either a fabrication or a misinterpretation of another animal (such as a rhinoceros), their beautiful, graceful image has become a permanent part of our culture. Most of us have listened to fairy tales as children. Who hasn't heard of Hercules at some point?
Myths can also merge with science. For example, the Romans knew that a certain blood vessel lead from the second finger on the left hand to the heart. Believing the heart to be the center of emotion, it was on this finger that they placed iron wedding bands on their brides.
Putting It All Together to Form Plausible Myths
Adding myths and superstitions to any fictional world can help make it seem more real, especially in one that hasn't yet reached the modern era. The farther back you can determine its origin and why it's a part of a fantasy culture, the better.
Keep in mind, chances are good that unless a race was formed with full knowledge of the workings of the universe, they're going to have some myths. Even if at some point they no longer believe in them, they're probably still going to be a part of their culture and history. "Lucky" designs may continue to appear purely for aesthetic value. Old legends would continue to be told for entertainment. Mythical beasts might appear in design or stories because they continue to amaze and fascinate.
Like the Roman wedding rings, even we continue to repeat traditions steeped in myth, superstition, and legend without really knowing why, other than that it's tradition or fun. We throw rice at weddings; how many of us realize it was originally meant to ensure children? We make noise when the new year arrives; this was originally a custom to drive away evil spirits.
There are infinite possibilities; the only limit is the limit of your imagination.