Positive illusion has been postulated to contribute to mental well-being, the ability to care and the capacity for productive and creative work. Proponents of positive illusions maintain that mild, and not delusional, levels of distortion are essential for mental health and do not detract from adaptive behaviours bound to objective reality. Opponents note that a distorted appraisal of reality and negative events could lead to misjudgment, risk-taking action, and perhaps longer-term negative consequences. Inline with more contemporary approaches to well-being, such as acceptance and mindfulness, we will propose a theoretical framework to establish appropriate parameters between actual reality vs. realistic appraisal. Moreover, we will argue that the missing link in the well-being research is the external and holistic measurement of optimal functioning; a dependent variable that psychology has tended to steer omit. We contend that while positive illusion contributes to mental health, an illusion-free appraisal can contribute to further well-being through courageous objectivity, and growth mindsets resulting in closer alignment to models of fully-functioning, measured by both external and internal criteria. This was presented at the 2016 International Conference on Well-being in Singapore.