(D) "Interpreting another person's dream requires that one understand the dream as a coherent narrative."
This is incorrect because the passage is discussing a game in which no real dream is ever told. Since the game is a ruse in this way, it does not reveal to us anything about actually recounting or interpreting someone's dream. Moreover, the object of the game is to "relate" the (non-existent) dream, not to "interpret" or "understand" it.
Does that make sense? Please let us know if you have any other questions!