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On his way to Pierce Publishing in New York City, where he works as a proofreader, milquetoast Walter Mitty has one of his many daydreams in which he is a swashbuckling hero.  At work, his boss, Bruce Pierce, steals Walter's ideas and then chastises him when he daydreams he is a famous brain surgeon impressing a lovesick nurse.  That night, Walter returns to the home he shares with his mother Eunice and has dinner with his fiancée, Gertrude Griswald, and her mother.

To escape from the three women's henpecking, Walter fantasizes that he is a British fighter pilot terrorizing the Nazis and wooing a French bar maid.  During his train ride the next day, glamorous Rosalind Van Hoorn attempts to escape from a suspicious-looking man, Hendrick, by pretending Walter is her sweetheart.  Walter, recognizing her as the girl from his dreams, agrees to accompany her to meet a friend at the docks, but soon after they locate a cab, he jumps out nervously at his office, leaving his briefcase in the cab.  When he then follows her to the docks to retrieve his briefcase, Rosalind's friend, Karl Maarsdam, hides a notebook in the briefcase before returning it to Walter.

Maarsdam then invites Walter to share their cab, but as soon as the driver takes off, Maarsdam collapses, dead.  Walter and Rosalind race to the police station, but as he tells his story to the police, the cab and the girl disappear.  She reappears at his office that evening and brings him to meet her uncle, Peter Van Hoorn, who explains that he is the former curator of the Royal Netherlands Museum, and that when the Nazis invaded he hid all the national treasures and recorded their whereabouts in a notebook, which a criminal named The Boot is now trying to steal.  Frightened, Walter leaves, but as soon as he enters a department store, he finds the notebook in his briefcase and spies Hendrick following him.  He runs into the models' salon and hides the notebook in a corset, which is promptly packed up and delivered to a Mrs. Follinsbee.

Later that day, one of The Boot's henchmen, Dr. Hugo Hollingshead, attacks Walter at work, causing him to crawl onto the windowsill and into Pierce's office, infuriating his boss.  When he goes home, his romantic rival, Tubby Wadsworth, embarrasses him in front of Gertrude.  The humiliated Walter escapes into a fantasy in which he is a famous riverboat gambler who wins Rosalind's heart.

The next day, Rosalind again appears and convinces him to help her retrieve the notebook, which they eventually find at a corset fashion show.  Walter, however, immediately forgets to bring the notebook back to Van Hoorn, forcing Rosalind to sneak into the Mitty house that evening, when Gertrude and her mother are staying over.  Walter alarms the other women as he attempts to hide Rosalind's presence, but manages to sneak off to Van Hoorn's with her.  There, Rosalind grows suspicious when she sees that Van Hoorn has Marsdaam's passport, and hides the notebook in Van Hoorn's desk without informing her uncle that it is there.

Soon after, she spots Van Hoorn's oversized shoe and realizes he must be The Boot, after which he abducts her and administers a sleeping pill to Walter.  When Walter wakes, Van Hoorn has gathered Mrs. Mitty and Pierce, and lies to them that Walter has been wandering around the grounds incoherently, that Rosalind does not exist, and that they should take him to see Hollingshead, a pyschiatrist.  Although Walter recognizes the doctor as his attacker, Hollingshead soon convinces him that everything has been a daydream.  The next day, as he is about to marry Gertrude, he finds a charm Rosalind gave him.  Realizing that she is real, he runs to Van Hoorn's, where he bravely discovers Rosalind and awakens her from her shocked state.  The criminals are about to catch up to them when the police, Pierce, Mrs. Mitty, Gertrude and Tubby arrive.  Their rebukes provoke Walter to finally stand up to them and display an assertiveness which wins him Rosalind's hand and Pierce's respect.