any items or pet passives/bonuses that "reduce damage by x%" effectively work as an addition to the algorithm. If given the amount of armor you have you have say, 37% damage reduction (behind the scenes mind you) that extra 2% damage reduction applies directly to that number, giving you a 39% damage reduction. It's a huge stat, because it's circumventing the normal armor associated algorithms that determine armor value based on things like level, level differences and the like and sticks it straight on. Damage reduction is a very powerful stat. The power of it this stat is why the damage reduction stats were reduced across the board for pets because they were incredibly overpowered with the revamp.
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