The battlefield is a disconcerting place, to say the least, full of confusion, death and unsettling circumstances. Under such conditions, it's not entirely surprising that troops might not perform in the manner that you wish them too. Faced with allies and comrades being slain at the hands of the foe, you may find that your warriors scatter and leave the battlefield, rather than fight on. In Warhammer we govern these situations, and the likelihood of them occurring, with the rules for panic.
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Panic (and more importantly, resisting panic) is an important factor in Warhammer. Battles can sometimes be won and lost because an army panics and flees, even though it may not have been beaten in combat.
Troops who are nearby when their friends are destroyed or run away can easily lose their nerve and flee, causing other nearby troops to lose heart until the whole army routs in blind panic.