Counterfactual thoughts are mental representations of alternatives to past events. Recent research has shown counterfactual thinking to be a pervasive cognitive process in normal populations and has linked it to effective problem-solving and decision-making. The present research demonstrates that counterfactual thinking is impaired in schizophrenia patients relative to normal control subjects; this impairment was evident using measures of counterfactual thoughts as well as counterfactual-derived inferences. Furthermore, this impoverished counterfactual thinking partly mediated impaired social functioning experienced by schizophrenia patients. Given the convergence of neuropsychological evidence showing counterfactual deficits in frontal lobe patients and the documented frontal deficits in schizophrenia patients, future studies investigating a specific relationship between counterfactual thinking and frontal lobe function in schizophrenia patients would be a logical next step in this line of research.