When Low Prediction Error Misleads Planning: Diagnosing Representation, Dynamics, and Decision Failures in Latent World Models

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The component that dominates a latent world model's prediction error need not be the one whose repair most improves action selection. We show this by comparing action sequences from identical physical starts and separating endpoint error into a candidate-pool center and action-relative responses. Across four model families and four tasks, a confirmation pool of 256 new starts per task and 300 shared candidates per start shows that center error dominates MSE in 14/16 model-task cells. Yet in six of these cells, an oracle that corrects only the action-relative responses yields better physical rank correlation and top-30 elite quality than one that corrects only the center, while leaving more latent MSE (family-wise corrected intervals). The preference differs across the evaluated settings: a separate LeWorldModel (LeWM) study that executes oracle-selected actions favors center repair on PushT and on Reacher with a render-matched goal. Matched-candidate tests localize ordering loss: for LeWM, encoding realized endpoints raises physical Spearman from 0.464 to 0.975 on that Reacher setting and from 0.193 to 0.631 on PushT (64 starts per task), while Cube's encoded-goal cost remains uninformative. A 72-run objective study improves selected response diagnostics, while incremental closed-loop planning gains remain unconfirmed. These results separate error magnitude from the decision effects of oracle correction and motivate evaluating representation, prediction, and planning as separate stages.