Wrong knowledge is false knowledge not based on the true nature and form of its object.
Another definition of this verse would be that we see the world as we are and not as it is.
Our internal judgments, attachments, fears and desires color our external world through our projected illusions and misconceptions.
Walking the Spiritual Path is walking the path to and of Truth. In order to do this, one must purify the mind of prejudices and wrong understanding through detachment and discernment, no longer mistaking (discernment—right perception) a piece of rope for a snake (detachment—not letting the emotions get the better of self).