It was such a bizarre delivery that it caught everyone - batsman, bowler, umpire, TMS commentators - by surprise. With the benefit of replays, it was shown to be a bad decision, but that benefit is not available to the umpires.
Terrible umpiring? No umpire is perfect, or ever will be. If an umpire gets nine decisions right out of ten - as is happeneing in this series, despite the controversies some are stirring up - that's actually quite good umpiring.
As for reviewing: Australia keep wasting their reviews on hopeless causes, causing them to run out, and not have them available when they really need them. Watson had just wasted one - and Rogers was so astonished by what happened to him, he didn't dare risk wasting the second (although it later WAS wasted).
Using DRS tactically is - for better or worse - another skill that teams must learn.