The game doesn't encourage players to believe in stereotypes any more than it does dragons. The stereotypes are present, and the stereotypes are subverted - just as in the real world. There are certain common threads, like the belief that all Khajiit are thieves. But this isn't a bad thing. To the Khajiit, thievery is an expression of skill and cleverness. They see it as an honor in a similar way to the stereotypical Nord views on valour in combat.
Acknowledging these differences between races is a form of racism, but what everyone seems to forget is that racism isn't necessarily bad. There is such a thing as positive racism; as celebrating the differences, rather than discriminating because of them. A real-world example would be mentioning that people on non-white descent would be less likely to suffer sunburn.
Racism is the basis of actions or views in the belief that the human species is subdivided into different races. This is neither positive nor negative. But because of negative racism being so visible in the public mindset, many people believe that discriminatory racism is the only definition of racism.
It's so prevalent that maybe the actual definition of racism needs to be changed, in keeping with how language evolves over time. Most people think as you do, and no matter what language traditionalists may think, language is decided by the interpretation of the majority.
that's not actually the definition of racism. it isn't just the belief that humanity is divided into races (which is, scientifically, false, btw).
1. the belief that all members of each race possess characteristics or abilities specific to that race, esp. so as to distinguish it as inferior or superior to another race or races.
That's just a different way of phrasing what I've said. If people could be divided into races, it goes without saying that there would be common characteristics or abilities. I deliberately didn't mention inferiority or superiority, though. That's where the nastiness comes in. All people are people. Even Argonians.