Blender currently uses the //Bone Heat //algorithm to automatically assign bone weights to a mesh.
The proposed //Bone Glow// algorithm improves over //Bone Heat// by fixing cases where it behaves poorly.
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.156.4787&rep=rep1&type=pdf
The provided example images should look very familiar to anyone that has used Blender's Bone Heat.