I've gotten some mixed anecdotes about how encounter settings work. I've heard about as many claims that encounter settings (Evasive/Defensive/Normal/Aggressive/Murderous) only account for how the sides arrange in battle. That means, it determines whether your unit attacks the enemy, ally, neutral, or hides. Sometimes the encounter setting might confuse the unit into watching the battle with some popcorn in the oven.
Others claim that they factor during the actual battle, in that defensives will stay back and aggressives will run forward.
Unfortunately, battle reports don't tell us the encounter settings, or so I believe. It has been a while since I saw a battle report.
