In case my impression is correct, that most people here aren't trying the dialog box, let me describe how it works.

If the hotkey consists of typeable characters, you simply type the hotkey one keystroke at a time and it gets entered. Each time you press a key, the cursor advances to the next field automatically.

But if you need to enter a key or mouse button that can't be typed, you can left click a field with the mouse and select the item from a drop down list.

This dialog combines direct typing with mouse selection. It can be used both ways.