Mental models are how we understand the world around us. They help us in understanding our environment and make better decisions. They shape not only what we think but also how we understand our surroundings and our relation with the same. Mental models are the tools to simplify complexity, how we reason and perceive our world. It is a representation of how something works.
As we cannot keep all the information of the world in our brains, mental models help us in breaking large information into smaller chunks which are easy to refer to when needed. The quality of our thinking and the quality of decisions we make depends upon the quality of mental models we have formed in our heads and their usefulness in a given situation.