Why are the people of Sighet reluctant to believe the truth, even when it's right in front of them?

The Jews didn't want to believe the worst.... they kept their optimism, fell for the German soldiers' initial fair treatment, and went about their business. They saw what they wanted to see.

From the text:

The officers were billeted in private homes, even in Jewish homes. Their attitude toward their hosts was distant but polite. They never demanded the impossible, made no offensive remarks, and sometimes even smiled at the lady of the house. A German officer lodged in the Kahns' house across the street from us. We were told he was a charming man, calm, likable, and polite. Three days after he moved in, he brought Mrs. Kahn a box of chocolates. The optimists were jubilant:
"Well? What did we tell you? You wouldn't believe us. There they are, your Germans. What do you say now? Where is their famous cruelty?"