Because if all your characters are unconcious, whats to stop the monsters from killing them?

Try looking at the status screen next time you're in a battle and a character is downed. It always says something like "KO" "Swoon" "Faint". They never die in battle. If all your characters are knocked out, then the monsters have free reign to kill you, which is why the game ends. Its not like the monsters would be like "Oh, they're good and unconcious, lets leave."