We present revised probability density functions for climate model parameters (effective climate sensitivity, the rate of deep-ocean heat uptake, and the strength of the net aerosol forcing) that are based on climate change observations from the 20th century. First, we compare observed changes in surface, upper-air, and deep-ocean temperature changes against simulations of 20th century climate in which the climate model parameters were systematically varied. The estimated 90% range of climate sensitivity is 2.0 to 5.0 K. The net aerosol forcing strength for the 1980s has 90% bounds of -0.70 to -0.27 W/m2. The rate of deep-ocean heat uptake corresponds to an effective diffusivity, Kv, with a 90% range of 0.04 to 4.1 cm2/s. Second, we estimate the effective climate sensitivity and rate of deep-ocean heat uptake for 11 of the IPCC AR4 AOGCMs. By comparing against the acceptable combinations inferred by the observations, we conclude that the rate of deep-ocean heat uptake for the majority of AOGCMs lie above the observationally based median value. This implies a bias in the predictions inferred from the IPCC models alone. This bias can be seen in the range of transient climate response from the AOGCMs as compared to that from the observational constraints.