Ian Kershaw's The End: Hitler's Germany 1944–45 is perhaps the best recent book on the topic. It focuses almost exclusively on the mentality and the decisions made by both national and regional politicians in Nazi Germany as well as the ordinary German civilians in keeping on fighting and enduring during the last two years of the war. I highly recommend it.

Back then, Germans only heard what the Nazi propaganda machine wanted them to hear.

Probably the only people who knew winning was no longer an option were among the High Command of the Wehrmacht. Some knew defeat or a stalemate was inevitable once Operation Barbarossa failed to take Moscow (even then, it is dubious that the Soviet Union would have lost if Moscow had fallen to the Nazis). Heck, the US introduction to the war wasn't even necessary to assure that the Nazis would be unable to defeat the Soviets. More Nazi officials probably saw the light when the counter-attack to relieve the encircled army at Stalingrad failed to succeed. The final nail in the coffin for anyone who wasn't certifiably insane or delusional was when they lost the Battle of Kursk.

Unfortunately, the propaganda was controlled ultimately by the person who didn't see the inevitable defeat after the Nazis lost the Battle of Kursk, namely Hitler. So even though, starting in mid-late '43, much of the High Command in the Nazi military likely knew the Red Army would eventually reach Berlin, none of their dissenting voices were heard by the public.

So why did the German people have this delusional mentality? Well, no one told them that losing was a possibility.

As for the soldiers? Well, until the Normandy landings, the only opposition a Nazi soldier could surrender to was the Red Army, which was understandably likely to be a fatal endeavor. Rest assured, the High Command were very clear about what the Soviets would do to surrendering Nazis (even if it some of it were lies).