It uses logic, let's say based on where the individual is born, where they may exist in life at a certain age, if they were living during a particular war or location to one, what/where they may be at a certain age.
The whole concept is to "fill the holes in the sand of your tree." It gets you LOOKING in the right direction -- or a direction you never thought about looking. I have to check a library in Ohio that has a book there, about an ancestor in Florida. How would I have known that by researching there it would lead me to the info?
As another poster wrote, I love the search by research location feature: I print it out and then when I get there, I know who I'm searching for at the library, for example.
The clean-up tool is perfect for your data missing county or city info. You can print a selection, fix them up and reload them back into Ancestry.com (manually or via FTM) and re-search your locations.
One example is some countries have been renamed after the war (Poland was called Russia, for example). Updating the country your ancestor was from will yield different search results.
Hope this helps you out. Been using the product for many years.