Though it is unclear how the Hunter acquires insight from this item, it seems that if a person who dies after being "touched by the wisdom of a Great One", or "making contact with Eldritch wisdom", has its effect remain in his/her skull, even after death. And upon smashing it with the hands, the Hunter is catching a glimpse of the Cosmos itself, thus gaining Insight.
The wisdom-in-folly as described by this item is similar to what madness is portrayed in the Renaissance. French philosopher Michel Foucault depicts this in the first part of his book Madness and Civilization: A History of Insanity in the Age of Reason: In the Renaissance the mad were portrayed in art as possessing a kind of wisdom – a knowledge of the limits of our world – and portrayed in literature as revealing the distinction between what men are and what they pretend to be. Renaissance art and literature depicted the mad as engaged with the reasonable while representing the mysterious forces of cosmic tragedy, but the Renaissance also marked the beginning of an objective description of reason and unreason (as though seen from above) compared with the more intimate medieval descriptions from within society.