The diagram is trying to show attempts to plot a bearing of a 'leg' from a map, where there's uncertainty on the true position of points at each end of the 'leg'. This uncertainty can be represented as an error circle, which contains the 'true' point, somewhere within the bounds of the circle.

The red case shows a very short leg, and the blue case shows a longer leg. The error circles are the same on both cases.

The straight lines represent the edges of the compass in the worst case error situations, connecting the opposite outside edges of the error circles. One line takes one extreme pair, and the other line takes the other pair. The 'true bearing' lies somewhere between these two lines, so the angle between the lines is the potential error in reading the bearing.

You can see that the angle between the two red lines is much bigger than the angle between the two blue lines, showing that, with a short distance between the end points, the potential bearing error is larger. They're plotted to overlap in the centre, so the angles can be compared...

Then there's the error in aligning the compass bezel, but that's the same in both cases...