In my experience around 99% of sites asking you to install "codecs", "browser extensions" or similar to view videos are sites that contain malicious software of some sort (a virus, trojan or spyware - sometimes even all of the above).
Unless you are 100% positive that it is a safe site, and it is providing a genuine "you need to update" message then I would be extremely weary of it.
A good example of a "safe" site might be Youtube telling you that your flash player is out of date and that you need to upgrade. At which point you would be pointed to the Adobe site to download the latest version.
Thanks, this is very informative! and I am aware that most sites get us to install fake add-ons but this was in facebook and youtube - i couldnt play any videos and it made me download a setup and run.. I trusted it because fb and youtube both asked for the link.
Funnily enough, I just edited my post to add a specific warning about facebook:
Some final advice: Be
very careful when you click links posted via Facebook. Likejacking is extremely common, and if you click a "video" on facebook you may find that it takes you to a site that
looks like Youtube, or a youtube video for example but in fact is not.
If it is a youtube video, you can generally find this out by right clicking - as the flash player options will be shown. If it's a fake video, often you will see either the standard browser right click menu (e.g. view source etc.) or view image.
If you do not know what likejacking is, be sure to read up on that
here too.
Likejacking can be
reasonably harmless as the majority of the time it is a survey scam (e.g. fill in this survey to prove you are a human and view the video!) however it can also be used to spread malicious software (and in this case it sounds like the latter happened).
Another issue - Does anyone know how to remove the "twitter" logo from Avast! notifications? I mainly get it when there are threat alerts, the little "T" logo - I find this VERY annoying and out of place.. I dont know why they have put it there in the first place since its very inappropriate.. Please let me know if anyone knows how to remove it 
Unfortunately currently there is no way to disable this. Nor the "Like" button in the main user interface

Considering you are using the paid version of the software (as am I), I think there should be an option to disable these... maybe in the future?