Author Paul Sweeney wrote "Self-delusion is pulling in your stomach when you step on the scales." A great visual example (someone should use that one in a commercial!).
Even when the subject is less fleshy, shall we say, human beings can succumb to delusional thinking.
For example, working with a recent grad, I was surprised when she emailed me a few job postings - of supervisory positions in environments in which she had not yet worked. That's delusional. You really must pay your dues and work your way up - yes, even with a degree.
At the other end of the spectrum I have clients who have many years' relevant experience, and hesitate to apply for an entry level management position, even though they absolutely have a chance! Rather than delusional, these folks don't give themselves enough credit! Once we've worked together to recreate their self-marketing documents, resume and cover letter, they are energized and cannot wait to launch their job search.