Unrealistic optimism is a pervasive human trait influencing domains ranging from personal relationships to politics and finance. How people maintain unrealistic optimism, despite frequently encountering information that challenges those biased beliefs, is unknown. Here, we provide an explanation. Specifically, we show a striking asymmetry, whereby people updated their beliefs more in response to information that was better than expected compared to information that was worse. This selectivity was mediated by a relative failure to code for errors that should reduce optimism. Distinct regions of the prefrontal cortex tracked estimation errors when those called for positive update, both in highly optimistic and low optimistic individuals. However, highly optimistic individuals exhibited reduced tracking of estimation errors that called for negative update within right inferior prefrontal gyrus. These findings show that optimism is tied to a selective update failure, and diminished neural coding, of undesirable information regarding the future.