Was this included in the movie to show the audience how unpredictable and "off" Willy was in general or was this just one of those random bizarre movie moments?
The boy was Gary Busey’s real life 6 year old son, Jake. It was truly a quirky scene befitting a quirky guy like Busey. As to the point of the scene, I think your interpretation is the correct one. The scene is discussed in “The World is Wrong” podcast which offers a deep dive into this movie. If you’re interested, you can fast forward the following link to the 30:46 time stamp for the discussion:
The podcasters surmised the scene was a complete ad lib on Gary Busey’s part after little Jake threw one final unexpected punch. Like you and me, they believe the director preserved the improv because it served as a red flag that Dembo failed to perceive