This is not through any "scientific"
evidence of any kind, but personally it makes a lot of sense to think that a dog doesn't really know the definition of "sit." They just know that when you say it, and they perform a behavior, they get rewarded for it. You could just as easily teach your dog to spin in a circle when you tell them "sit." They don't know the word's definition, they just know that when you ask for a down they don't get rewarded for speaking, but when they lie down they get rewarded. When you ask for a spin, they don't get rewarded for retrieving their ball, but they get rewarded for spinning. So in this simple way of thinking about it, the most obvious conclusion is that it's all about what's rewarded and what's not. Yes, they do develop a connection of this word=this behavior, but if your dog could talk and you asked him what something meant, he wouldn't really know. If you asked him what "Shake" meant, he'd probably tell you, "Well I paw at you when you tell me that and you give me treats." (Assuming he had the vocabulary to form that sentence!
) So it's really all about conditioning a response in your dog. They don't necessarily "understand" the word itself in the human sense of the word "understand," but they understand that they get rewarded for certain behaviors when certain sounds(words) are made.
Not to insult human intelligence at all,
but really the same could be done with a person, except that people have the ability to form and comprehend definitions. Let's say I made up a word for an object, let's say it's "THERIGANDUM," and therigandum happens to refer to a bright yellow stapler. If I walk up to you and say, "Bring me the therigandum," you won't have a clue what I'm talking about until I give you more information as to what it is. Kind of like the "I Spy" game--which could be translated into how you get the behavior from your dog (luring, shaping, etc). You'll ask what the heck I'm talking about(the lapse in time where your dog tries to determine what you want), and I'll give you a clue. "Well, it's yellow" (treat brought to dog's nose). You'll look around, and then ask for another clue. "Well, it's yellow and somewhat rectangular." (treat at dog's nose and lured into sit) You'll look around, and ask for another clue. "Well, it's yellow, somewhat rectangular, and attaches multiple pieces of paper together with a metal clasp." You find the bright yellow stapler and bring it to me. (Aha! Dog sits.) "That's exactly what I needed, thanks!" (Click and reward.) The next time I ask for the therigandum, you'll respond much quicker, and eventually because I've rewarded you in some way(thanking you) for bringing the item I had in mind, you'll know that when I ask for the therigandum you'll be rewarded if you bring the yellow stapler.
That all may sound silly, but that's the best analogy I can think of. Not sure if this helps you or not.