The ability to make appropriate decisions that result in an optimal outcome is critical for survival. This process involves assessing the environment as well as integrating prior knowledge about the environment with information about one's current internal state. There are many neural structures that play critical roles in mediating these processes, but it is not yet known how such information coalesces to influence behavioral output. The lateral habenula (LHb) has often been cited as a structure critical for adaptive and flexible responding when environmental contexts and internal state changes. A challenge, however, has been understanding how LHb promotes response flexibility. In this review, we hypothesize that the LHb enables flexible responding following the integration of context memory and internal state information by signaling downstream brainstem structures known to drive hippocampal theta. In this way, animals respond more flexibly in a task situation not because the LHb selects a particular action, but rather because LHb enhances a hippocampal neural state that is often associated with greater attention, arousal, and exploration. In freely navigating animals, these are essential conditions that are needed to discover and implement appropriate alternative choices and behaviors. As a corollary to our hypothesis, we describe short- and intermediate-term functions of the LHb. Finally, we discuss the effects on the behavior of LHb dysfunction in short- and intermediate-timescales, and then suggest that new therapies may act on the LHb to alleviate the behavioral impairments following long-term LHb disruption.