1. Sherlock Holmes deduces that the thief who stole the racehorse could not have been a stranger because the watchdog did not bark, indicating the thief was known to the dog.
2. Deductive reasoning moves from general premises to reach a specific conclusion, while inductive reasoning moves from specific observations to broader generalizations.
3. However, inductive and deductive reasoning both have limitations, as conclusions based on reasoning could turn out to be incorrect if premises are flawed or observations prove inadequate.