I assure you that the amount of people saying literally to exaggerate their point is orders of magnitude higher than the amount of people who don't understand what literally means, and the editors of Merriam-Webster know this. The dictionary's website even describes the process by which its editors decide what words deserve to be in it.
To decide which words to include in the dictionary and to determine what they mean, Merriam-Webster editors study the language as it's used. They carefully monitor which words people use most often and how they use them.
Each day most Merriam-Webster editors devote an hour or two to reading a cross section of published material, including books, newspapers, magazines, and electronic publications; in our office this activity is called "reading and marking." The editors scour the texts in search of new words, new usages of existing words, variant spellings, and inflected forms–in short, anything that might help in deciding if a word belongs in the dictionary, understanding what it means, and determining typical usage. Any word of interest is marked, along with surrounding context that offers insight into its form and use.
So if enough people are using literally to mean something other than what had been the standard definition of literally, then it would only make sense to literally make it so literally literally isn't literally.