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The Radiant AI system was introduced in Oblivion after Morrowind's AI was deemed too simplistic. NPCs carry out standard actions like conversations, pathing, attacking etc. This often led to out-of-context behavior by NPCs, such as city guards attacking each other without reason.
For Skyrim, the system has been updated with more complex subroutines. Citizens of cities and towns now all follow a unique schedule. NPCs also adapt to situations that eschew from their normal agenda. Creatures have also had their behavior improved.
An extension of the Radiant AI system, the Radiant Story handles the optional side quests in Skyrim and reacts to player actions by dynamically changing the quest structure.