He was very funny, just like any healthy, happy, and loved pre-schooler, but I have no idea why you think he was too young for "all this palaver ..", or why you think it would be confusing?
He was obviously enjoying himself, he wasn't at all upset, he had his mum there with with him, and his siblings. Children at that age have new experiences all the time, it only seems strange to you because at that age you hadn't had many, if any, of the experiences that they have had.
Louis will also have seen lots of videos of his mum and dad, grandparents, and
great-grandparents, and other paternal relatives, sitting, waving in carriages whilst passing throngs of people. Hardly anyone that he was actually in the company of will have been a stranger.
I know that at that age I would have loved being in a horse drawn carriage with lots of people to wave at, and have wave back at me! Being on the balcony with his Great Granny will probably be the best and most enduring memory he has of the Queen. I am sure that all 3 of the Cambridge children will cherish the videos and photos from today.