Dialogues and reputation system are important aspects of Pillars of Eternity. Each decision have an influence on character's personality and his reputation among the factions found in the game.
When having a conversation, don't click random dialogue lines. Read all available options and choose the one you mostly agree with it. In most conversations in the main storyline you can make a single decision and have no way of changing your mind later. With each answer you progress the story and you are not allowed to return to previous dialogues. If you will pick your answers unwisely, you might offend your interlocutor or even provoke him to attack.
During conversations, additional information will show both on the left and the right (after turning on the "Show personality/reputation" option) side of the dialogue lines. On the left you can see requirements that must be met to be able to say a specific line. There are few types of requirements. One of them is minimal level of some character attribute (might, constitution, dexterity, intellect, perception or resolve). The right skill is a second requirements type (athletics, lore, stealth, survival or mechanics). Sometimes to be able to pick a specific dialogue lines you must be of correct race, class or even have the right deity. If you met the requirements, that line gives you some bonus, like some enemies will run away before battle, some of them will surrender immediately, you can be awarded with additional reward as well.
On the right side of the dialogues consequences of your decision for your personality are shown. For example, when you're joking from others, your character will gain traits like cruelty or cleverness. Virtually every dialogue line has a small impact on your character's personality. His current personality can be seen on the right side of character screen. Each indicators doesn't have important influence on the gameplay, sometimes the way other NPCs treats you depends on them.
During some quests you might be forced to face a very important moral decision. As a consequence of some of them you might even lose a companion. Luckily, usually they talk to you and suggest which option should be chosen for them not to leave the party.
Much more important than your character personality are his relations with factions. Many times you must back one of two or more groups fighting each other. It has impact on large amount of side quests. When you're making such decision for the first time, it is wise to pick one faction and stay with it for the rest of the game. Sadly, it means that you won't be able to complete few quests for other factions, what's more - they might even become your enemies. It ends with them sending a group of assassins at you, whom you might meet in random locations. They might even attack your stronghold.
When you're stealing, you lose reputation. When you're caught, you lose reputation at the faction to which the item belonged. If you're not inside a faction building, but, for example, in inn, your reputation at the local community will drop. But there is no trouble with selling stolen items, even in the same place where you acquired them.
Don't worry too much about reputation. It is more like an indicator of your route and decisions so far than an important factor that influence the game. Most side quests and possibilities remain available no matter of your decision.