In 1976 J. Allan Hobson and Robert McCarley proposed a new theory that changed dream research, challenging the previously held Freudian view of dreams as subconscious dreamily wishes to be interpreted. Activation synthesis theory asserts that the sensory experiences are fabricated by the cortex as a means of interpreting chaotic signals from the pons. They propose that in REM sleep, the ascending cholinergic PGO (ponto-geniculo-occipital) waves stimulate higher midbrain and forebrain cortical structures, producing rapid eye movements. The activated forebrain then synthesizes the dream out of this internally generated information. They assume that the same structures that induce REM sleep also generate sensory information.

Hobson's 1976 research suggested that the signals interpreted as dreams originated in the brain stem during REM sleep. However, research by Mark Solms suggests that dreams are generated in the forebrain, and that REM sleep and dreaming are not directly related. While working in the neurosurgery department at hospitals in Johannesburg and London, Solms had access to patients with various brain injuries. He began to question patients about their dreams and confirmed that patients with damage to the parietal lobe stopped dreaming; this finding was in line with Hobson's 1977 theory. However, Solms did not encounter cases of loss of dreaming with patients having brain stem damage. This observation forced him to question Hobson's prevailing theory which marked the brain stem as the source of the signals interpreted as dreams. Solms viewed the idea of dreaming as a function of many complex brain structures as validating Freudian dream theory, an idea that drew criticism from Hobson. In 1978, Solms, along with partners William Kauffman and Edward Nadar, undertook a series of traumatic-injury impact studies using several different species of primates, particularly howler monkeys, in order to disprove Hobson's postulation that the brain stem played a significant role in dream pathology. Unfortunately, Solms' experiments proved inconclusive, as the high mortality rate associated with using a hydraulic impact pin to artificially induce brain damage in test subjects meant that his final candidate pool was too small to satisfy the requirements of the scientific method.