To underdress means to wear clothing that's too casual or plain for a particular occasion. If you show up to a fancy wedding in jeans and a t-shirt while everyone else wears suits and dresses, you've underdressed. If your friends all wear costumes to a Halloween party and you arrive in regular clothes, you're underdressed.

The opposite is overdress, when you're too formal for the situation. Both can make you feel awkward.

Context matters enormously. Shorts and sneakers are perfect for a picnic but would be underdressing for a school awards ceremony. A comfortable sweater works great for a movie with friends but means you've underdressed for your grandparents' anniversary dinner.

People sometimes choose to dress slightly more formally than they think necessary, because it's easier to remove a tie or a cardigan than to magically produce dressier clothes if they've underdressed.