http://www.polygon.com/2015/5/30/8691219/killer-instinct-tea...
It probably uses a hybrid or AI and scripting techniques.
As for things like human reaction limits etc, that can built into the AI as part of parameters it needs to operate within.
Not making an AI that has perfect response, but a "human-like" one.
It would make for a formidable opponent since you can still defeat it (with a good dose of luck).