The idea that dreaming can serve as a model for psychosis has a long and honourable tradition, however it is notoriously speculative. Here we demonstrate that recent research on the phenomenon of lucid dreaming sheds new light on the debate. Lucid dreaming is a rare state of sleep in which the dreamer gains insight into his state of mind during dreaming. Recent electroencephalogram (EEG) and functional magnetic resonance imaging (fMRI) data for the first time allow very specific hypotheses about the dream–psychosis relationship: if dreaming is a reasonable model for psychosis, then insight into the dreaming state and insight into the psychotic state should share similar neural correlates. This indeed seems to be the case: cortical areas activated during lucid dreaming show striking overlap with brain regions that are impaired in psychotic patients who lack insight into their pathological state. This parallel allows for new therapeutic approaches and ways to test antipsychotic medication.