Shane Long headed the home side into an early lead and although the European champions levelled through Eden Hazard they were undone by Peter Odemwingie's winner in the 50th minute.
And Di Matteo, who was at the helm of the Baggies from June 2009 until February 2011, admitted the Blues need to find a better balance between attacking intent and being sound at the back.
The Italian told Sky Sports: "Defensively we were not good enough to win the game after conceding two goals. Thinking that you need to score three to win the game is just mad.
"We know we can play a bit more defensively. We are trying to find the right balance where we can create chances and win games, but we have to start with being defensively more attentive."
The Chelsea boss, who left regular starters such as Oscar, Juan Mata, Ramires, Ashley Cole and Branislav Ivanovic on the bench, claimed the team selection was influenced by the demands of international football.
"It was forced on us with the international games in midweek," he said. "We had players coming back from long trips overseas with five or six hours of time difference.
"They were very fatigued and tired and were not in condition to start the game."
The Blues have taken just two points from their last four Premier League games to fall four points behind leaders Manchester City and face a crucial UEFA Champions League date with Juventus in Turin on Tuesday night.