Whether better AI is fun or not depends on (A) the sorts of advantages/disadvantages it is given and (B) its skill level compared to the player.

When people say they want better AI, they mean they want smarter + human-like AI without "cheating" (more resources, perfect aim, rubber banding, perfect knowledge, etc).

And even if you build a human-like AI, it's not going to be fun for players if it's too good, just like how humans have the most fun playing against other players at their level, not against the top-ranked players in the world.

So to keep AI fun, there is always going to be artificial limitations, and "people want terrible AI" doesn't really capture that.

One example might be games where you can hear footsteps or a branch snap. With stereo audio, you could technically derive exactly where someone is, possibly even which room they are in. When that raw signal is provided directly to a machine, it might accidentally be too good, know which bush you crawled into, and shoot into it.

Yet humans would only be able to go "I think I heard a branch snap" or "someone must be creeping up on me" even though they are given the same signal as the AI.