Thinking about what might have been—counterfactual thinking—is a common feature of the mental landscape. Key questions about counterfactual thinking center on why and how they occur and what downstream cognitive and behavioral outcomes they engender. The functional theory of counterfactual thinking aims to answer these and other questions by drawing connections to goal cognition and by specifying distinct functions that counterfactuals may serve, including preparing for goal pursuit and regulating affect. Since the publication of our last theoretical statement (Epstude & Roese, 2008), numerous lines of empirical evidence support, or are rendered more readily understandable, when glimpsed through the lens of the functional theory. However, other lines of evidence have called into question the very basis of the theory. We integrate a broad range of findings spanning several psychological disciplines so as to present an updated version of the functional theory. We integrate findings from social psychology, cognitive neuroscience, developmental psychology, clinical psychology, and health psychology that support the claim that episodic counterfactual thoughts are geared mainly toward preparation and goal striving and are generally beneficial for individuals. Counterfactuals may influence behavior via either a content-specific pathway (in which the counterfactual insight informs behavior change) or a content-neutral pathway (in which the negative affect from the counterfactual motivates generic behavior change). Challenges to the functional theory of counterfactual thinking center on whether counterfactuals typically cohere to a structural form amenable to goal striving and whether behavioral consequences are mainly dysfunctional rather than functional. Integrating both supporting and challenging evidence, we offer a new theoretical synthesis intended to clarify the literature and guide future research in multiple disciplines of psychology.