Some people turn the headphones volume down low enough so that they *think* that they can hear most of what's going on around them. But when you're cycling, it's sometimes the very soft very subtle noises that can provide important warning information. For example, you might be able to hear a car coming loud and clear, but will you hear the idiot cyclist who doesn't yet know how to use their brakes properly and who is approaching from a direction that you are not expecting?
I do know of one person who when he goes cycling with a group, he sometimes has a boom box strapped to his back rack and plays it softly. I'm not advocating this, but I'm just saying that it's what some people have done instead of wearing headphones.