These two pull-down menus are a way to help your AI Avatar to become more animated.
You don't have to use them, but if you do the emotional intelligence of your conversation should increase. Your choices add to the AI's understanding of emotion, and when to display emotions in your Avatar.
First, choose your most immediate reaction to the thing that the AI just said.
Then choose the emotion that best describes how you feel as you reply.
The small expand buttons to the right of the menus open new, tall and narrow windows in the top right of your screen - assuming that they've not been blocked by popup-blockers.
These windows are designed as palettes that you can leave open, allowing you to more quickly select reactions and emotions than is possible with the menus. When you click on one of the reaction or emotion links they simply change the menus for you in the main chat window.