To misunderstand is to incorrectly interpret what someone means. If you misunderstand the directions for taking your medication, you might end up feeling loopy or passing out.
When a football player misunderstands the coach's instructions, he might make the wrong play. If a baker misunderstands what you ask him to write on your best friend's birthday cake, he might misspell her name. The verb misunderstand adds the "bad" or "wrong" prefix mis- to understand, from an Old English root, understandan, that literally means "stand in the midst of."