Yes it's confusing for the end-user, as I said they should improve their UX in that setting page to make it clear what this setting changes.

However, your original comment was saying that prefers-color-scheme is bugged in Chrome is not true. It works as intended: it follows both UA-level and OS-level settings correctly.

The settings in Appearance tab is not a setting for preference when browsing the web. Many apps have a setting to choose if their app should change appearance when OS setting changed (or to override it), they could simply leave out this setting and let Chrome chrome (app ui) always follow the OS setting or always be in default light mode, instead they gave users to choose "how their Chrome browser will look like", not "how every website they visit should look like".

You can set the appearance mode (light, dark, device) under chrome://settings/appearance . If you change the mode, the settings page (which is a website) adopts that mode, so a user would naturally assume this is also the mode for displaying web content.