That's not what I said. The enemy heroes generally have a limited spell selection, like 3-5 spells at their disposal. Sometimes they have NO direct damage spells, so when you say there are tons of better spells than Pygmy you are right, but the HERO DOES NOT HAVE THEM. If the hero casts Pygmy, it's because it is the best spell that the hero has at that particular moment. Some heroes just have awful spells which is a design decision and not a flaw of the AI.
For the few heroes that have Ice Snake, Fire Rain, and Geyser, they use it every round until they run out of mana. For the heroes with Fireball sometimes they don't use it because it will only do 700 damage, while a spell like Pygmy will prevent 1000+ damage. If those were the only two spells you had, you'd do the same thing.
Actually, that's not true. I'm pretty sure you'd ignore all reasonable arguments in favor of telling people how awesome HoMM 3 is and how dump KB is.
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