Krishna addresses a common human failing. The deluded see him walking, talking, eating — and conclude he is just another person. They cannot look past the human form to see the supreme reality within.
We do this constantly in everyday life. We meet a quiet, unassuming person and dismiss them — only to discover later that they carried remarkable depth. Appearances deceive those who stop at the surface. In Krishna's case, this misjudgement is cosmic in scale: the Lord of all beings stands before them, and they see only a man.
The word 'mudhah' does not mean stupid in an insulting sense. It means clouded — someone whose vision is obscured by what is immediately visible. They are not evil, just unable to see beyond form.