Scientific advances in the twentieth century have allowed researchers to study the chemical activities taking place in the sleeping human brain. In the 1970s, researcher Barry Jacobs drew on these advances to propose that a shared neurochemical basis in the neurotransmitters serotonin and norepinephrine accounts for the observable similarities between dreams and hallucinations. To test Jacobs` theory, researchers attempted to elucidate the role of serotonin and norepinephrine in the normal sleep cycle and the effect of hallucinogenic drugs on these neurotransmitters.

Serotonin appears important for managing sleep, mood, and appetite, among other functions, while norepinephrine facilitates alertness and mental focus. Both neurotransmitters are discharged in high quantities only during waking states. At the onset of sleep, the neurons that release these neurotransmitters become less active, allowing the brain to enter the three non-rapid eye movement (non-REM) stages of sleep. The non-REM stages typically are not associated with normal dreaming, though parasomnias, such as sleepwalking and confusional arousals, are most common during stage 3. When the brain is ready to enter the fourth stage, REM, which is strongly associated with dreaming, the levels of these two chemicals drop virtually to zero. The Jacobs hypothesis held that the absence of norepinephrine was required to enable the brain to remain asleep, while the absence of serotonin was necessary to allow dreaming to occur.

Lysergic acid diethylamide, or LSD, is a semi-synthetic psychedelic drug which causes significant alteration of the senses; at doses higher than 20 micrograms, it can have a hallucinogenic effect. LSD mimics serotonin well enough to be able to bind at most of the neurotransmitter's receptor sites, largely inhibiting normal transmission. In addition, the drug causes the Locus coeruleus, a cluster of neurons containing norepinephrine, to greatly accelerate activity. If the drug stimulates norepinephrine, thereby precluding sleep, and inhibits serotonin, creating a necessary condition for dreaming, then the resulting hallucinations could merely be "dreaming while awake." The research thus far is promising but inconclusive; future scientific advances should allow this theory to be tested more rigorously.