The Radiant AI in Oblivion was supposed to bring towns alive, give each NPC a purpose, conditions to be met and other dynamic things. Unfortunately, it resulted in random riots and deserted towns because the villagers all killed themselves, so they scrapped most of the AI from it.
The following are humorous examples of unexpected behavior discovered during early testing:
Example 1: One character was given a rake and the goal "rake leaves"; another was given a broom and the goal "sweep paths," and this worked smoothly. Then they swapped the items, so that the raker was given a broom and the sweeper was given the rake. In the end, one of them killed the other so he could get the proper item.
Example 2: Another test had an on-duty NPC guard become hungry. The guard went into the forest to hunt for food. The other guards also left to arrest the truant guard, leaving the town unprotected. The villager NPCs then looted all of the shops, due to the lack of law enforcement.
Example 3: In another test a minotaur was given a task of protecting a unicorn (there is only one unicorn in the game). However, the minotaur repeatedly tried to kill the unicorn because he was set to be an aggresive creature.
Example 4: In one Dark Brotherhood quest, the player can meet up with a shady merchant who sells skooma. During testing, the NPC would be dead when the player got to him. The reason was that NPCs from the local skooma den were trying to get their fix, didn't have any skooma, and were killing the merchant to get it.
Example 5: While testing to confirm that the physics models for a magical item known as the "Skull of Corruption," which creates an evil copy of the character/monster it is used on, were working properly, a tester dropped the item on the ground. An NPC immediately picked it up and used it on the player character, creating a copy of him that proceeded to kill every NPC in sight.
Makes me think the NPCs were actually sentient and got lobotomized.