If the instance property of an entity is set to Hidden, value will be identified only if it present in previous user utterances and user will not be explicitly prompted.
In the dialog you provided, as the entity is configured with instance property at user input as “Hidden” and user input “lookup 1 2” didn’t imply a definitive choice, the entity value is not extracted.
However, when the user input is configured to Mandatory at the instance properties of entity, user should provide a value and based on the user input “lookup 1 2”, platform prompts the user to make a choice.
Request you to please try with the input like “lookup 1” when the entity is set to “Hidden” which will extract the value for the entity.
Incase, multi item is enabled and the entity is of type hidden, an input like “lookup 1,2” will retrieve [1,2] as the entity values