It doesn't show it doesn't understand. It shows that
if it is capable of understanding, it's reasoning skills in some areas lag its language, and that is confusing to us. Plenty of people would fail to answer that riddle without prompting, but they'd likely answer in simpler language, and so we would evaluate them accordingly.
I asked it a bunch of riddles yesterday, and it failed to get many at first, until I led it through parts of the reasoning the way you'd lead a child.
E.g "you leave your camp, go 3 miles south, 3 miles east, 3 miles north, and find a bear in your tent. What colour is the bear?" At first it said it couldn't tell. I then asked it where the tent must be for the description to be true, and it correctly answered the North pole. I then asked what colour the bear must then be, and it correctly got the answer.
If I had to lead a child through it like that, my reaction would not be that the child can't understand. But when ChatGPT responds in formal, adult language it makes it hard to give it the same benefit of the doubt.
I don't know how much we can say that it actually understand, but I also think it's too easy to dismiss it like that. It is also too easy to assume based on other examples that it is "smarter" than it is.
Accurately evaluating understanding is hard especially because it's ability to solve problems is "lopsided" - it's unusual to be this dumb while at the same time being so eloquent and "well read".