In some respects, your character is a bit like a Barbie doll. You can play dress up if you want. Since most clothing is hidden by your armor, whether you choose to do so is up to you. I havent noticed any difference in peoples reactions whether Im a walking tank, dressed to the nines, or buck naked. Most likely this was something that was supposed to go into the game, but it either didnt make it or it was so buggy that it had to be taken out.