To deepen this out a bit, the game has a handful of disguises you can wear. There are five different roles you can assume on top of the standard role (which is mercenary) and they will influence you quite a bit (the guide says six roles, but as far as I could figure thief and robber are the same role). Robbers won't attack you if you're dressed up as one of them, but on the other hand baron's guards will. The Free Republic of Arkanar guards don't mind mercenaries or even robbers, but will attack you if you look like a noble don. It's a bit ridiculous that even people that know you will sometimes not recognize you if you're in the wrong get-up. But other than this it is pretty well-applied, and offers some alternatives in quests, such as walking up to robbers dressed as one of them and getting them to flee by warning them the guards are on the way. To assume a role, you have to wear 5 matching pieces on 6 possible slots (heavy armor, light armor, hat, cloak, pants, shoes). You can't switch roles if someone is watching you.
What's a bit weird is that nobody seems to care how you solve the problems you face. In fact, people don't care what you do much at all. A good example: at one point, you'll be stopped by a group of guards and told to see their leader. The first time, I just did what they suggested and talked to their boss. Then I tried the alternative, namely fighting them all off and then storming the city gates to escape. My escape was successful, but I then found that even knowing where to go I couldn't progress the main quest without talking to their boss. So I went back and talked to him. Did he mention that I killed two dozen of his men? Did any of the remaining guards care? Heck no. The reactivity of the world is pretty damned low.