Learn Spanish (Latin America): Debemos estar callados, mejor dicho, observadores y prudentes. - We must be quiet, or rather, observant and cautious.

mejor dicho is a reformulation marker used to self-correct, clarify, or find a more accurate word for what you just said. It translates well to "or rather" or "better said." While más bien is similar, it is typically used to contrast with a negative statement or to mean "instead" (e.g., "I'm not sad, más bien I'm tired"). Since you are simply upgrading your word choice in an affirmative sentence here, mejor dicho is the most natural fit.

Why do we use estar for observadores and prudentes? Aren't those personality traits that usually take ser?

That is a great catch! Normally, if you say somos prudentes, you are describing a permanent personality trait ("we are cautious people"). However, by attaching them to estar (which carries over from estar callados), you change the meaning to describe how you must behave in this specific situation. You are saying "we need to act observant and cautious right now," making it a temporary state.

What is the literal translation of mejor dicho?

Literally, it translates to "better said" (mejor = better, dicho = said, which is the past participle of decir). It's a very logical phrase: you are literally telling your listener, "Here is a better way to phrase what I just told you."

Does mejor dicho always need to be surrounded by commas?