In the middle of the first character generation screen is a scale with a dagger for the pointer. This scale is the relative difficulty of improving your skills in order to gain levels, hence the name "Difficulty Dagger".

Each time you attempt to use a skill, whether it be picking a lock, swinging a sword, selling an item or whatever, a check is made against the appropriate skill to see whether you are successful or not. The game keeps track of how many times it checks each skill. When the required number of checks are made, you have a decent chance of seeing an increase in that skill.

But just like real life, the less you know about something, the easier it is to learn something new. The number of checks required to increase a skill goes up in skill increments of 15%. When your skills are below 15%, it only takes a few uses of a skill to increase the skill level (I've seen skill increases off of 2 skill uses, but the dagger was at 0.3x and the skill was less than 10% at the time). From 15% to 30%, it takes about 10 to 15 checks against a skill before you'll see an increase in it. From 30% to 45% it takes 30 checks. It takes more uses when you reach 45%, even more after 60%, a bunch after 75% and a ton after 90%. You modify the number of checks required to increase a skill by raising or lowering the difficulty dagger. When the dagger is at 0.3x, it takes about 1/3 as many checks to see a skill increase. When the dagger is at 3.0x it takes about 3 times as many checks.

For example, let's suppose you're unloading your goodies with a local merchant. If your dagger is set in the middle and your Mercantile skill is at about 30%, you will have to make about 20 sales to see an increase in the skill. If your dagger is set at .03x, you might only have to make six sales, but if it's at 3.0x you might have to make 60 sales before your Mercantile skill will increase. And remember, the higher your skill level, the more times it will have to be checked before it will increase. So the name of the game is to get that dagger as low as possible.

With everything left at the default values, the dagger is at 1.0x. If you added health points to your character, then the dagger rose (a little or a lot, depending on how many you added). This means it will be more difficult for your character to gain levels. In other words, you’ll have to use your skills more times before you’ll see an increase in the skill level. If you want to gain levels quickly, then you need to move the dagger down toward the other end of the scale. In order to do this, you must saddle your character with disadvantages or penalties to offset any benefits you may have taken. You may have no more than 7 advantages and 7 disadvantages.

One item which will raise or lower the dagger, but you can't see the results is choosing reflexes. "Reflexes" is how quickly the critters react. If you choose "Very High", the critters will move and attack faster, giving you less time in which to react. Since this makes the game more difficult, your difficulty dagger is lowered, albeit only slightly. On the other hand, taking slower game reactions will give you more time to react and think about what's happening, but it will also raise the dagger. Most gamers are very comfortable with "Very High" reflexes. Newer players will probably want to play the game for a bit at slower speed in order to get used to the interface. Once you choose the game's reaction time, you may not change it. Or at least if you can I haven't come across the method yet (and don't think I haven't tried - as memories of being pounced on by five Ancient Liches come to mind).