The "correct" answer is:
1, 2, 3, 4
1, 2, 3, 4
Your son's answer is:
1, 2, 3, 2
1, 2, 3, 2
As you can see, there's no obvious reason why the last number should be a 2 as in your son's pattern of four digits. The 4 in the "correct" answer is self-explanatory.
Well, that's the simple answer. The complicated answer is this:
A sequence is a progression where the next figure comes from something being done to (an operation being performed on) the previous number.
The given "correct" answer is a sequence of four numbers repeated twice where each step is simply the previous number + 1.
Your son's answer is a repeating pattern, but it's not obvious why the pattern repeats the way it does. If it was to be a proper sequence, you're looking either at a long description:
A number smaller than 3 with 1 added to it, unless the number was preceded by a 1, in which case it's the number minus 1. Or the number before the number being changed was a 3, in which case its also the number minus 1.
Or an incomplete triangle wave:
1, 2, 3, 2, 1, 2, 3, 2, (1)
And, whilst it's intuitively elegant, a triangle wave has a considerably more complicated mathematical description than a simple progression: en.wikipedia.org/wiki/Triangle_wave
So, your son is technically right, but at this stage I would agree that he should be marked as wrong. Coming up with ideas is a valuable talent, however, what is even more valuable is knowing which ideas are likely to be correct in the context of the question. When studying decimal places, a Maths book is not expecting an understanding of triangle waves. Where the teacher went wrong is not giving a good reason why the answer in the book is the called the "correct" answer. The text book is simply saying "I'm going to assume the kids go with the obvious sequence".
What I would do is ask DS which of the two possible answers is better and ask him to explain why he thinks it's better. You could introduce him to Occam's Razor:
"Other things being equal, simpler explanations are generally better than more complex ones."
Then you could ask him why, given that there's only space for one answer, the 1, 2, 3, 4 one was chosen. Then ask him what could have been done to make the question better. Finally, ask him what he hoped to achieve by sticking with his answer and think about how he could have dealt with the situation in a way that reflected better on himself. Sometimes politics dictate that it's better to go with the flow, sometimes it's worth showing that you can think outside the box. Sometimes it's best to show you're able to think outside the box but respectfully go with the majority decision anyway! There's also a debate to be had about respecting authority vs standing up for what you believe is right.
Lucky you, a cornucopia of learning opportunities!