I remain fairly convinced that they were fully aware of how thunderously poo the implementation of the difficulty system was, and yet decided to go forward with it anyway out of sheer stubbornness.
My favourite hypothesis is that the game director thought difficulty modes weren't in line with the spirit of the franchise or somesuch, but that it was forced upon him by the executive board because, c'mon, every game has difficulty modes. He gave in on the condition that they'd be using the online functionality of BW2 to count how many percent of users were bothering to change the difficulty, and how many just left the game on default. If the difficulty modes weren't used much, they wouldn't have to be implemented in the next Pokémon games going forward.
Cue the most deliberately obnoxious implementation of difficulty modes in gaming history, and during design meetings for the next games the game director could triumphantly show that only half a percent or so of players ever used the difficulty modes during the main story, with the rest keeping the default mode on.
That, or the esteemed director-san had what he thought was a good idea, instructed it be put into the game, and then dismissed all feedback from the playtesters on grounds of seniority. "What do they know, they haven't been making these games since the 1990s and I have. The feature stays."
Either way, it would be hard to convince me that any significant portion of the designers thought this system would honestly be a good idea. If you can open a door without the aid of an instruction sign more than half the time, you know that this system is incredibly antagonistic to anyone who wants to use the feature.