Data exclusions tell Google Smart Bidding to ignore a past date range when conversion tracking was broken or distorted, so a tracking outage does not poison future bidding. They look backward, unlike seasonality adjustments, which look forward.
What they fix
If a tag broke and conversions went unrecorded for a few days, Smart Bidding would otherwise learn from that false dip and pull back. A data exclusion tells Google to disregard that window so the artifact does not distort bids.
Use them narrowly
Data exclusions are only for genuine measurement failures, and Google advises keeping them short. Do not use them to paper over real performance drops. They are the backward-looking counterpart to seasonality adjustments, which prepare bidding for a known future spike.