Based on an
undisclosed algorithm, it's choosing the next track based on what you've listened to (more than half the track) and what you've skipped since starting it. Note it will keep adding new tracks to PN, indicating skipped items by strike-out. So the idea is, it will attempt to learn from your choices and choose something consistent with them.
If you select the command from the main menu (rather than the context menu), you'll see settings for
Use the currently selected files as the seed for radio playback, and
Edit Radio Files. The first will shorten the "training" process. The second allows you to restrict the files it will select from.
Experimenting with the seeding feature, the algorithm seems to weigh Genre and Year heavily. But who knows. I need a cookie...