A kissing cousin to acquiring a reputation, the Hindu notion of karma is the idea that your positive and negative acts have long-range repercussions for your own well-being. Personally I tend to believe this, even though it takes a bit of time to prove.
For our purposes, Karma in a game is a Cohesiveness Technique. For example, if you help an NPC in one part of the game, and his or her friends or relatives help you later in the game, that's karma.
The flip side of this also applies. For example, if you kill the T-Rex early in the game, the other T-Rexes intuitively know this and come after you later on.
You can use this technique to create some interesting emotionally complex situations (see Chapter 2.15, "Emotionally Complex Moments and Situations Techniques"). For instance, imagine this sequence:
Early in the game, you kill Zack, a guy who was once good but who turned bad due to his financially desperate circumstances.
This itself is emotionally complicated to you, the player, if you know that he didn't want to be evil. And it's even more complicated if his desperate circumstances were the result of being robbed by someone else and weren't a result of his own mistakes, bad judgement, or him having taken stupid risks.
Later in the game, you meet Conrad and Megan, two friends of Zack. They don't know he's dead, nor (obviously) that you killed him. If you like Conrad and Megan especially if they aid you in some important way or if they help you get through a dangerous situation then you'll have mixed feelings about the fact that they don't know you killed their friend. Once again, you'll be in an emotionally complex situation.
If they then learn you killed Zack, they could get furious and try to kill you. Now you have the choice of either having to kill your friends, or run from them in order to save them from your killing them, which is what would most likely happen if you fight them. Either of these choices to kill them or to flee is emotionally complex.
In the preceding sequence, I took a simple notion Karma and then added emotional complexity to it. I call this process Complexification. Later in the book, Chapter 2.29, "Injecting Emotion into a Game's Story Elements," covers this in depth.