This article proposes that optimal psychological functioning is associated with a slight to moderate degree of distortion in one's perception of self and world. Past evidence suggests that substantial distortions provide a dangerous basis for action, yet recent research has shown that highly accurate perceptions are associated with depression and other maladaptive patterns. By seeing things as only slightly better than they really are, the individual may enjoy the affective benefits of illusions while avoiding the pragmatic, behavioral risks of acting on false assumptions. Departures from this optimal margin of illusion are associated with risks and difficulties, and power hierarchies may be an important arena for studying these problems.