https://www.youtube.com/watch?v=pjbx6-KQoRg
This is an infamous video because the entire demo was clearly scripted (Todd and BGS haven't done anything like this sense due to the outcry). However, it does give you an idea of how Radiant AI was actually going to work. On the contrary, BGS was on the cutting edge of really revolutionizing NPC behavior in video games. The problem is Radiant AI was too smart and too unpredictable. It would easily break the game and thus BGS reeled it back as a result.
Occasionally you'll see hints of that unpredictable nature in BGS's newer games, but it's definitely not what BGS ever intended the system to be. I'm hoping at some point it's something they revisit as it was by far one of the most exciting features of Oblivion. Sadly, so many amazing features that were supposed to be in Oblivion were cut either due to time constraints, console hardware limitations, or just not functioning as BGS had intended.
I actually think true Radiant AI would make for a rather comical experience. The problem is the game could be a lot of fun, or it could be absolutely miserable based entirely on the behavior of the various NPCs at the time. There's no way of controlling it, but it's that unpredictable nature that I always found compelling, even if it is scary from a game development standpoint.
BGS would have to be careful with that. The last thing they want to do is have the enemy NPCs killing each other off and the player just sitting back and watching. While I agree the NPCs shouldn't just automatically assume the player is around somewhere, I think it would be more conducive if the enemy NPC were to investigate and try to figure out what happened. What would be really interesting, ableit too difficult, is if enemy NPCs could identify different kinds of wounds and determine what the cause (what kind of weapon was used) of death was and who likely killed their fallen comrade.