Why exactly do we dream?
We have all heard that when people lose their sight, their hearing improves dramatically. Surprisingly, the underlying reason for this might also explain why we dream.
When a person loses vision, the part of her brain that used to process light signals (called the visual cortex), is taken over by other senses. Often, the auditory cortex (which processes sound) expands to incorporate part of the visual cortex, leading to more neurons devoted to hearing, which in turn, causes a blind person's hearing to become superior.
Recently however, we have realized that this capture of brain territory by competing senses can happen without any permanent hearing or vision loss, and that too, astonishingly fast.
When people are blindfolded for a few days, due to loss of visual input, their visual cortex shrinks and other brain areas devoted to hearing or touch, overtake the brain area previously devoted to the visual cortex. This has been confirmed by brain scans of blindfolded people.
Amazingly, for some subjects, it takes only 40-60 minutes for this reconfiguration to take place! And here's where dreaming comes into picture.
When we're asleep, the visual cortex is at a disadvantage compared to brain areas devoted to other senses. The reason is that visual input is cut-off during sleep, while other sensory inputs like touch or sound are not.
This means that other brain areas can encroach upon the visual cortex, and use it's neurons for their own processing. Remember that it took only 40-60 minutes for blindfolded people's visual cortex to start shrinking.
If this happens during sleep, then upon waking, your vision might be poor for some time before becoming normal, and this delay could mean the difference between life and death, especially if you're woken up for an emergency.
So, what the brain does is to feed you artificial visual input so that the visual cortex is engaged even while sleeping, and it's territory is not overtaken by other brain areas.
In brain scans of people undergoing REM sleep (which is the part of sleep when we dream), electrical spikes are seen to go from the brainstem to the visual cortex, which is why we're able to have visual hallucinations at night (which we call dreams)
The purpose of dreams then, in this new interpretation, is to keep the visual cortex busy at night so that other brain areas don't steal steal territory devoted to seeing.
Further evidence for this is the fact that the older you get, the less you undergo REM sleep (and dreams). In older individuals, the brain is less plastic, and hence, there's less chance of one brain area taking over the neurons of another brain area. As such, there's less need of keeping the visual cortex active at night, and hence, less need for dreams.
(Summarised from David Eagleman's brilliant book "Livewired". Note that this hypothesis is new and hasn't gained consensus yet)