Counterfactual thinking refers to mental constructions of alternatives to past events. In this overview of the psychological basis of counterfactual thinking, we examine how such thoughts influence emotions and carry benefits for everyday behavior. Two psychological mechanisms, contrast effects and causal inferences, can explain many of the effects of counterfactual thinking reported by psychologists. We then consider how counterfactuals, when used within expository but also fictional narratives (for example, in alternative histories), might be persuasive and entertaining.