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Babies begin to understand rules even before their first birthday, but the ability to form and adapt rules in their mind happens only after a few years. From early on, your baby will learn to interpret when you say not to touch something but the formation of 'executive function', where a child truly begins to think, understand and analyse for themselves, develops slowly over their first five years.
Executive function is the ability to examine a situation, apply behaviour known on learned rules or experience, and then be able to refine their behaviour based on the outcome for future experiences. For example, a baby will open a cupboard and pull everything out, but it takes an older child to actively look for a packet of biscuits in the cupboard, learn how to get to them if they are out of reach and manage to obtain them. This development takes several years and isn't simply down to experience, the part of the brain that assists executive function is one of the last parts of the brain to develop.
By four years old, your toddler is more intelligent than the adult of any other species on the planet! This may seem surprising, but no other animal comes near to having the understanding or reasoning of a four year old child. Of course, in human terms, there's still an awfully long way to go, but next time your little one does something that makes you proud, just remember that they're already inside the top 0.1% of most intelligent creatures on earth!