You speak of trying to understand the religious mindset. One thing that may contribute to your frustration with that task is that there really isn't one monolithic and unified mindset among religious people in general, or even Christianity specifically. Forgive me if I'm stating the obvious here, but it is a point worth keeping in mind when trying to understand non-atheists. My answers to your questions will not provide any real illumination on the way all Christians think. In fact, they will contradict the views of some. But I hope you find them helpful in some way, because I believe you are sincerely trying to understand rather than to challenge or discredit others.
I believe that the Bible is a collection of chapters written by humans describing the events of their times and their interpretations of those events. A book compiled through debate and deliberation of many more humans, religious scholars of different communities over a long period of time.
This overview of biblical canonization gives more detail. It has been translated into hundreds of languages and is available in dozens of versions. I do not believe the Bible is the absolute literal word of God. How could it be?
I do believe that the authors were divinely inspired, but at the end of the day, they were also human, as were those who followed them and made decisions about which of their writings would be chosen as the voice of religious authority. If it is the literal word of God, God had a habit of contradicting himself from time to time.

You'll find some very good information on the differing views of groups of Christians on the inerrancy of the Bible
here.
You make a very important point in your post above the role of upbringing and experience as factors in one's religious choices later. My faith is far more rooted in my life experiences than it is tied to absolute belief in religious scripture. I was raised in a very open and loving church congregation by parents who involved my sister and me in volunteerism early on based on their understanding of the teachings of Jesus Christ in the Bible. I suppose that can fairly be called indoctrination. But I will say this: the Christianity I was taught was not afraid of questions or doubts. I was very involved church activities with strong leaders who encouraged open discussion and viewed being a Christian as a lifelong journey. I went on to serve as a missionary for several years in Africa, the Middle East and back here in the States as part of a multicultural program embracing peace and justice and the Christian call to work for both around the world.
Obviously I'm no biblical literalist. I would agree with you that there is indeeed "some bad stuff" in the Bible. That said, I suggest to you that to throw it out and replace it with a new book that just "leaves out all the bad stuff" would be just as subjective a process as the original canonization. Who would decide what got left in and what got left out?
The Bible is as complicated as we are as humans. That is one of its beauties, to me. It challenges those of us who believe in God and in the example of Jesus Christ to continually read it, digest it, reflect on it and eventually find our own inspiration - and outrage - in its words. Some of us will draw different conclusions than others. There is no way around it, I'm afraid.
The short answer is, there is no universal answer to your questions. But I've given you mine, and I hope it was helpful in some small way.
