Walter Mitty is an ordinary man with an overly active imagination. He constantly daydreams about something more exciting than his current situation. The entire story is about a trip into town. Walter and his wife drive into town so that he can shop and she can visit the beauty salon.
Walter has fantasies of being a pilot, a surgeon, and an assassin. These are all daydreams that help him to escape his ordinary circumstances, which don't seem especially great for him. He is a timid and forgetful person who seems somewhat unassertive, especially in his relationship with his wife. At one point he forgets what his wife has asked him to buy, because he is so caught up in his daydreaming.
While the previous answer is right to point out how this can be a problem for the character, I also believe it is a useful coping mechanism for him. In many ways his fantasies are similar to the therapeutic escape that readers experience through literature. In this sense, Walter is using daydreaming to cope with a less than perfect life. He finds adventure through imagination.
The Secret Life of Walter Mitty tells the story of a man who is always daydreaming about being someone else. Any time in his ordinary life, and at any moment, he can be transported by one of his waking dreams, forgetting about what he is doing in his real life, such as driving his car, or shopping for items his wife told him to buy.
Walter Mitty is constantly pulled into a fantasy life where is a successful and sought after hero. He dreams he is a fighter pilot, a successful and skilled surgeon or about to be shot by a firing squad, all very exciting.
The problem with Walter Mitty is that he spends way too much time in his imagination and not enough time in his real life. In real life Walter Mitty is very inept, incapable of taking care of his own life.