The 2005 E3 demo video showcased a new system called "Radiant AI", which gave them general goals to achieve, how the goals were to be achieved was totally up on the NPC and the environment they were in.

This, however, presented problems when it was first implemented, as there were no "rules" for the NPCs to follow, only goals. This would cause many problems for the player including quest-lines being broken. Some examples are an unseen NPC going around town, buying up all the armor from the town stores, and another was an NPC important for the Dark Brotherhood questline would end up being found dead, as he was also a Skooma dealer and was killed by other NPCs needing the Skooma. As a result, many of the behaviors of the RAI had to be toned down significantly in the final release.
Contributed by G-Haven