I used to pick songs as I played them, in response to the audience's mood, but now (on the rare occasions I play out) I write out my sets, time them, and rehearse them in order. There always has to be room to change things, so I make the list long, then "trim to fit" at performance time(easier for me to have on list that I cut from, rather than two lists, one to cut, and one of possible adds). I have found, that I now need to have the written music, chords, and lyrics on hand and in performance order for quick and panicked reference, because in recent years I have had a lot of memory problems, and I've been known to have to fake my way out of songs I've been doing for thirty or forty years)--

Even with all the preparation, I nearly always I end up adding a song or two in response to requests or a special occasion, and I keep this very spontaneous, which is to say, I play as much or as little as I remember, then fill out the rest "creatively", doing a sing-a-long, having audience members to perform. or whatever--

When I worked with a dance band I got into the habit of working from a pre-arranged set list, and discovered that you need less material and less rehearsal when you do it that way, and you have much more control over your show--