What a coincidence! I had this same problem on my first pair of mittens last week.
Let me see if I’m visualizing this correctly: you have a mitten which is complete except for 10 or so stitches on one side which are on a stitch holder. Between the completed part of the mitten and the holder is a hole for your thumb (if you stick your hand in the partially completed mitten, your thumb will stick out of there).
If that is correct, then hopefully my advice will be helpful. I think the pattern wants you to pick up the stitches around the edge of that hole so that you are knitting a circle around the entire hole. The stitches you have on the stitch holder now only make up one side of the thumb, and only half a thumb is not very useful in winter weather. However, by picking up the stitches you are making a nice circle all the way around the thumb, thus creating a complete (and warm) thumb.
As for decreasing, unless you’re a perfectionist I don’t think that it’s crucial exactly where you knit the stitches together. I agree with BillSpace; you’re just decreasing to compensate for the stitches you picked up. You do need to pick up a bunch of stitches because if you didn’t you’d have holes on the base of your thumb. Imagine if you just picked up one stitch; you would have two enormous holes on either side of it. Therefore, you pick up a lot so you don’t have this problem.
Because you picked up a lot of stitches along the edge of the hole to create the thumb, if you continued to knit all of them the thumb of your mitten would end up quite thick, thicker than it needs to be. Therefore, you do need to reduce the number of stitches.
I hope that this wasn’t all completely confusing. It’s hard to describe this sort of thing if the person’s not sitting right next to you.