Outlook, by itself, doesn't have that ability. However, there's a tool
called Outlook-Quotefix (available from http://home.in.tum.de/~jain/software/outlook-quotefix/) that can insert
smilies when it sees strings like and LOL in mail you receive.
Try this:
New Message--> Tools--> AutoCorrect Options--> check: Replace text as you type
If the smiley face icon isn't in the list, you can add it from Wingdings...