Just IMO...
I've already beaten the original game as a goody-two shoes... and have begun to play the Lost Chapters as one also.
However, I have started an evil character, and it's really not too shabby!
You have to start out as a decent guy, though, in order to stay alive as an evil dude, up to a point where you don't get your butt kicked by a couple of town guards.
There is more money in being evil when doing silver quests, because you're usually after traders and stealing stuff.
When you're very good, you have a slight halo over your head, plus "phantom" butterflies fly around your character. When you're evil enough, you sprout knobs from your head (which eventually grow to be horns), your eyes emit a bit of red light, you become more pale, and later on you will have a bit of red "smoke" that stays present at your feet as if you were a devil.
As for the Arena, you need to go to... crap, I forgot the name of it. But it's the rainforest area that you fight the White Balverine in. I believe that from the village, you head out to the next area, then instead of heading towards the Temple of Avo, you go the path less traveled.
The arena is SO worth going to... make sure you have plate armor all around and a good weapon. Will is good too, but not exactly necessary. Have Enflame and/or Divine Fury ready.
Hope this helps you a bit.