The draft DSM-5 proposes multiple new disorders, and broadens the diagnostic criteria of existing disorders. This will lead to inappropriate diagnosis, resulting in misallocation of healthcare resources, with inevitable opportunity costs. In particular, it will result in inappropriate and potentially harmful prescribing of antipsychotics and other psychotropic drugs. Among the disorders that are likely to be inappropriately diagnosed and treated are attenuated psychosis syndrome, autism, bipolar disorder, and attention deficit hyperactivity disorder. If the diagnosis of attenuated psychosis syndrome is included in DSM-5, this will result in substantial iatrogenic harm in the form of stigmatizing labelling and adverse effects of antipsychotic drugs. There is already evidence of diagnostic up-coding with autism and bipolar disorder, and this is likely to increase with the new broader diagnostic criteria. Furthermore, the broadening of diagnostic criteria to include subthreshold disorders will facilitate the increasing corporatization and siloization of mental health services which promote treatment of prodromal conditions and simultaneously reduce treatment access for people with chronic conditions. Misallocation of resources to such services will also lead to neglect of non-medical needs, including housing, employment, social and educational support. The authors of DSM-5 have good intentions, but they need to accept that their current proposals will have damaging unintended consequences. They should address the weaknesses of DSM-IV, not exacerbate them, both to prevent iatrogenic harm and to protect the future of the DSM.