In overdiagnosis, a clinician identifies an abnormality that would never have hurt the patient, and treats it as an actionable pathology. You can never know who is overdiagnosed in real time; it only becomes apparent after the fact, while examining populations.
In a way, the term "overdiagnosis" is misleading. It implies an error of judgement in the diagnosis process. But more exactly, it's an error of prognosis. Overdiagnosis is inaccurately predicting the future of an abnormality. It is making the judgement that an abnormality is sufficiently likely to be dangerous that some kind of action is required.
Overdiagnosis is one of the reasons that a good clinician will be careful about ordering too many tests. If a test is needed to solve a clinical problem, great. If the test is a vetted preventive health measure, great. But if it's not either of those, it's possible that any abnormalities uncovered will not be meaningful, and that chasing them - with further lab tests, imaging and biopsies - might lead to more harm than good.
Why does overdiagnosis happen? There are many possibilities, and a few of them are emotional, or on an intuitive level. For example, I believe that clinicians and patients with a low tolerance of uncertainty order more testing because the uncertainty makes them uncomfortable. They believe that empirical studies are the only way to achieve peace of mind. One medical commentator says:
"Yet medical, and especially paediatric, practice takes place in a sea of uncertainty: diffuse or intermittent symptoms, borderline or equivocal tests, unanticipated turns of events and complicated patients and parents whose real issues may not be the ones they first tell you about."
The same author says over-adherence to guidelines might be partly responsible. Rather than observing mild abnormalities like mild neonatal jaundice, providers are encouraged to make them into pathologies and treat them. If they don't, they risk of appearing non-compliant with best practice.
Guidelines, after all, are often created in the setting of substantial uncertainties.