So I'm curious to know about this mechanic, is it a pre-recorded demo of the level that someone finished, or does the AI actually finish the level such that it does it differently and responds to environmental threats correctly each time? 

" So I'm curious to know about this mechanic, is it a pre-recorded demo of that someone finished, or does the AI actually finish the level such that it does it differently and responds to environmental threats correctly each time?  "

I think it's a pre-recorded Luigi who beats the level for you.  I think that's how it works.

1. Lose 8 times.
 
2. A green block appears, hit it.
 
3. Luigi comes out and shows you how to beat the level.
 
4. You can now play the next level!

It is a AI character that runs a pre-defined route since the level always starts the same every time and the enemies walk predefined paths.

To be specific, the paths Luigi runs when using the Super Guide were runs recorded by the developers at Nintendo.  They are not "perfect" runs in that they will not collect every coin and uncover every secret in the level, but rather take the most direct path to the goal.  Once the Super Guide run is complete, you have the option to either continue on to the next stage, or try the stage again yourself using the knowledge gleaned from watching Luigi as a sort of strategy guide.  You may also take control of Luigi at any point during the Super Guide run through a level, but once you do you cannot give control back to the game.
 
And as stated previously, the option to use the Super Guide only presents itself if you have died eight times on a single stage.

I am a bit disappointed in this, actually. When I first heard of Nintendo's patent, I was as irritated as everyone else. But the idea of switching to a "watch this game played" mode at any time very much grew on me. Not necessarily for a Mario platformer, but in general: Bein able to sit back and watch gameplay footage of a game you're into at any time. Maybe grab a snack. Or surf a bit while the game plays itself. Jump back in at any time if you feel like taking control. 
All optional, of course. No, I would have liked that.