To some degree it does but mostly with relations as friends will help you in a fight, someone who hates you might attack on sight.
Enemies starting to hunt you would have to be scripted somehow if nothing else to avoid having all enemies at once starting to track you They planned to have goblins track their totem but it was dropped, probably because of unpredictable damage then they tried to enter towns.
Megatown in Fallout 3 had this problem with random enemies, at high level raiders might be able to getting past the gate defence and kill a lots of people in the town.

Yes I would like to see more of this, perhaps also fear, if you had killed a lots of bandits, groups might hunt you but single highwaymen would get out of your way as they know you are dangerous.

If it's possible...it'd be nice...almost like an ingame quest reminder...

Actually, Bethesda (and any other game developer) can easily do something robot programmers with billions of dollars of funding find difficult (though not impossible, if you check what current-generation military robots are capable of doing right now) to do, if only in one area: perception.

The thing is, perception (which includes visual and aural components as well as natural language processing) is very easy in games compared to real life:

* Object recognition is greatly simplified since all objects already are separate entities. In real life, it's a complicated image classification problem. In games, it's a couple of line-of-sight checks.

* Same for sound recognition: A real-life system needs complicated programs to differentiate between a gunshot and a door being shut; a game already knows which sound it played.

* Natural language processing (recognising the meaning behind the sentences) isn't an issue either: Tone, politeness level, implied references to previous conversations are all known in advance or irrelevant for a game, while they give real-life NLP systems a hard time.

The thing is .. Bethesda chose to do almost nothing of that in Oblivion. Programming NPCs to try and duck out of the way of incoming objects (say, chairs, eggs or fireballs) would be trivially easy compared to doing the same with a real-world robot. Alas, they don't. Neither do they remember that some guy standing right beside them already told their current conversation partner all the rumours they know; they'll happily tell them the same one over and over again. Yay, the Oblivion gate of Kvatch is closed, did you know? Outside of the combat AI (which you can't reprogram yourself for the most part), Oblivion NPCs are blind, deaf and have an attention span of a mayfly on acid, and it's not really better in Fallout 3. Let's hope there's some improvement in Skyrim ...

If it is so easy, why hasn't it happened in any game period?

If it is true that Bethesda is just lazy, then why haven't Valve, or Blizzard, or any other number of big companies make anything like that yet? You are demanding something that haven't yet been achieved, because no one knows how to get it working.

Who said it didn't? Try out Dwarf Fortress.

They are dots on a screen. They bypassed all the hard work by leaving everything to the imagination. Come back when DF could scale up to first-person view.

Non sequitur. We're talking about AI here, not graphics.

This is an interesting topic and I would say that Bethesda are really the only big game company that I know of who are working in this direction.

Someone said they didn't think elder scrolls games are proper RPGs because the world didn't adjust enough to your actions. Well I would say it does, but within pretty narrow bounds. But it has been getting better more or less with each version in the series. A big blow for this type of procedural emergent gameworld came with full voice acting. It is simply vastly more expensive to put spoken word in the game than text, and while it is possible to splice together coherent sentences pragmatically as text it is nigh on impossible to do so in a way that sounds natural for voice. This inherently limits the degree to which NPCs can react to the players actions.

But my point is that Beth games achieve this better than pretty much any other CRPG games I've played at least on a procedural emergent level. You can script in multiple paths and there are companies who do this like Bioware, but then the limits of available resources tend to mean you end up in more or less the same place in the end. What Bethesda games do is they let you fill in the blanks with your own imagination. I have freedom to do a great many things, that I have to let my imagination take care of some or indeed all of the reaction to those actions is simply the way things are at the moment. In that sense its much like pen and paper roleplay where I am not only a player but also in some senses a GM. The game provides the framework for that story and the freedom to do as I please, I provide the actual meat of the story in my own head. Games like Dragon age or Neverwinter are more like choose your own adventures, a set series of encounters with a few branching options.

It's the difference between trying to write AI for ants in an ant farm and write AI for NPCs in a TES city.

Dwarf Fortress AI is not as sophisticated as you imagined to be, and they would stop working properly once you get close enough to notice the flaws.

How does the level of the AI have anything to do with the presentation of the results? An ant farm - if simulated properly, with three-dimensional, ever changing and changeable environments, and agents which can feel vibrations, heat and cold, humidity and a multitude of olfactory clues (some of them they can produce themselves) is way complicated an environment than any TES city we were presented with so far anyway, Daggerfall cities included.

DF AI includes memory, likes and dislikes, proper sensory management (if the body parts an agent sees with - like eyes - are damaged enough or destroyed, the NPC can't see anymore and acts like it too), needs (food, drink, shelter) and different modes of navigation (walking, swimming, diving, flying) in a 3D environment. It's not perfect - the game's focus is simulation, not AI, after all - but it's significantly better than Oblivion's of Fallout 3's AI, and a good base for what I'd like to see in Skyrim. It basically lacks proper planning and reasoning, but that's in the works.