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.