Fear Factor lets you know how your subjects see you, as either a cruel and ruthless tyrant or an easy-going on forgiving friend of the people. Your fear factor determines how productive your workers are, as well as the morale of your troops.
Placing entertainment buildings around your castle will make you seem like a good Lord. This will boost morale and increase your Popularity, but at the same time will reduce your workers’ productivity as they engage in idle pursuits.
Placing punishments around your castle will make you seem like a Bad Lord. Your peasants will fear you and as a result work harder, but this will unsurprisingly make you unpopular and reduce troop morale.