Why is 0 ft a valid target altitude for an autopilot?
Quite simply, it's because sometimes you fly below sea level. There's a couple stories out there of aircraft navigation systems acting a bit odd due to their flight below sea level. For example, there is this one, which involves a C-130 landing on an airfield that is 1,210 feet below sea level.

There are numerous areas in the world that are below sea level. For example, flying at sealevel above Laguna Salada, Mexico means you are still 30 feet above the ground! It's added as an additional option to cover a small set of scenarios. A pilot is certainly not expected to select the incorrect altitude setting, as this is something that you should always doublecheck. Beyond that, he should not have enabled his autopilot so soon after takeoff (unless 1,500 was his cruising altitude).