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Regions within the prefrontal cortex are thought to process beliefs about the world, but little is known about the circuit dynamics underlying the formation and modification of these beliefs. Using a task that permits dissociation between the activity encoding an animal’s internal state and that encoding aspects of behavior, we found that transient increases in the volatility of activity in the rat medial prefrontal cortex accompany periods when an animal’s belief is modified after an environmental change. Activity across the majority of sampled neurons underwent marked, abrupt, and coordinated changes when prior belief was abandoned in favor of exploration of alternative strategies. These dynamics reflect network switches to a state of instability, which diminishes over the period of exploration as new stable representations are formed.