How to adjust the size and placement of chapter heading in report class

The error message indicates that you were trying to use the "easy setup" with \titleformat* in a wrong way. For substantial formatting modifications, use the non-starred variant \titleformat and for changing the spacing, use \titlespacing*. Below are the default settings, which you can change according to your needs:

\usepackage{titlesec}

\titleformat{\chapter}[display]
  {\normalfont\huge\bfseries}{\chaptertitlename\ \thechapter}{20pt}{\Huge}
\titlespacing*{\chapter}
  {0pt}{50pt}{40pt}

For example, to center the title, reduce the space before from 50pt to 30pt and the space after from 40pt to 20pt, you can do:

\documentclass{report}
\usepackage{titlesec}
\usepackage{lipsum}

\titleformat{\chapter}[display]
  {\normalfont\huge\bfseries\filcenter}{\chaptertitlename\ \thechapter}{20pt}{\Huge}
\titlespacing*{\chapter}
  {0pt}{30pt}{20pt}

\begin{document}
\chapter{Test Chapter}
\lipsum[4]
\end{document}

The regular (numbered) chapter header in report is set by \@makechapterhead:

\def\@makechapterhead#1{%
  \vspace*{50\p@}%
  {\parindent \z@ \raggedright \normalfont
    \ifnum \c@secnumdepth >\m@ne
        \huge\bfseries \@chapapp\space \thechapter
        \par\nobreak
        \vskip 20\p@
    \fi
    \interlinepenalty\@M
    \Huge \bfseries #1\par\nobreak
    \vskip 40\p@
  }}

You see a 50\p@ (or 50pt) vertical gap before setting \@chapapp\space \thechapter in \huge\bfseries; then another 20\p@ gap and the title in \Huge\bfseries, and yet another 40\p@. Starred chapters are set using \@makeschapterhead:

\def\@makeschapterhead#1{%
  \vspace*{50\p@}%
  {\parindent \z@ \raggedright
    \normalfont
    \interlinepenalty\@M
    \Huge \bfseries  #1\par\nobreak
    \vskip 40\p@
  }}

You can change these values to your liking.