The ancient Norse (the Vikings) thought that the Northern Lights were reflections from the shields of the Valkyries as they carried mighty Viking warriors who had died in battle off to Valhalla. (heaven)  When the Northern Lights were red, they thought it was the glow of Vulcan's forge or blood dripping from Thor's hammer.

The tribes of the arctic lands also believed that the lights were carrying dead people off to heaven.  They also believed that if they got too close, the lights could grab them and take them as well.  For this very reason, many of these cultures are scared to death of the Northern Lights and run and hide when they come into view.

Other ancient explanations include Gods showing off their power, embers of a distant fire in heaven, adults and children playing kickball in heaven, ect.

Today, with science as our guide, we know the real reason the Northern Lights occur.   First we have to understand a little bit about the sun.  Our sun has an atmosphere called the corona.  It also has a magnetic field.  In the corona there are dark spots, or rather calm or slow places.  The corona is constantly spraying out large amounts of highly charged particles.  These particles would all be flying at us but the suns magnetic field catches them and scoops them back into the sun.  But over these "calm" places, the magnetic field of the sun can't catch the charged particles.
As a result, these highly charged particles come flying at us through space.  When they get to earth's upper atmosphere, the ionosphere, they make certain atoms in the air glow brightly.  different atoms glow different colors and even the same atoms glow different colors at various altitudes.  Now we would have these Northern Lights all over the world except for one reason:  When these charged solar particles reach earth, our own magnetic field or fields pull these particles to the north and south poles.  This is why we only see them in the arctic and antarctic.