Damage Reduction (or "DR") is a stat in Pillars of Eternity.
When an attack hits, there is one primary means of mitigating damage: Damage Reduction. Damage Reduction value is usually derived from armor, but many creatures have natural DR or can raise it through the use of magic. Abilities, Talents, or other equipment.
Damage Reduction is subtracted directly from all incoming damage. E.g., an attack that initially does 20 damage to a target with 7 DR would be reduced to 13.
Damage will never be reduced below 20% of the initial incoming amount. When this minimum value is hit, you will see a MIN message in the combat log on the attack line.
Note that many suits of armor and many creatures will grant different Damage Reduction values against the different Damage Types. Lower DRs protect against less damage, making the target more vulnerable to attacks of that type.
