Sorry, decision, not deduction.

Honestly I've seen this done a lot and I always end up disappointed because it's so one-dimensional.

I'm not saying it's a bad idea, I'm just saying that life is a whole lot more complex than a single "good vs bad" continuum. Also, a lot of the games I've seen this in make it an explicit system, which I think detracts from it a lot. Don't tell me about how 'holy' or 'mean' I am. Just implement the effects in the game. I don't have a 'reputation bar' in real life, but I have to deal with the effects of reputation in my social interactions. That goes for sparkly shit too. If I'm nice to people a lot I don't start glowing and if I'm mean my skin doesn't turn red and black. I think it would be a lot cooler if you just implement the effect of the system without trying to advertise to the player that the system exists. It seems really lame to me to go around doing things for extra 'good points' so that I can get some item. It just becomes another form of currency instead of a fluid part of the game system.

That being said, I really like the idea of psychological effects on the player character. Doing something dangerous makes you braver, etc. As long as the game is structured such that being braver actually effects the gameplay (in other words, you may freak out in battle if you're not brave enough or something) that could be really interesting.

Oh and one other thing. If you DO implement a 'good' vs 'evil' system then for the love of god make sure it's balanced. I get so frustrated when a game tells me I can be good or evil and then punishes me for being one or the other. Black & White sounded awesome to me until I tried to play an evil god and found out how quickly I ran out of worshipers.