It indicates that the driver is missing several brain cells and you should treat their driving with utmost caution!! (To paraphrase this answer, see j2's answer above!!)
It's so that Neds can identify each other.....just in case the ear drum bursting stereo, cavernous exhaust, huge alloy wheels, outlandish body kits and stupid paint jobs aren't enough.
I'm sure it's just old age on our part.. They're probably not all boy/girl racers and are just trying to be different!! Most schoolkids say they don't like school uniform yet they all turn up in identical denim jackets or identical sailing-type jackets. We were young once :-)
The lights you're probably talking about are fitted in place of the standard washer jet nozzles. They work as washer jets and light up. You can get all colours I believe. As several people have mentioned already, fitting them is a question of taste..
being 24, descended from aristocracy (grandfather in house of lords etc blah blah) and owning a very fast car... i cannot put neon lights, love of tacky cars (i,e fiestas, novas etc) down purely to youth. notice its only working class kids who have them? it does seem the "in thing" to have. but i have also seen the little blue lights on lorries as well. but christ, have you seen the christmas decorations some lorry drivers have in their cab?