Recent cognitive neuropsychiatric models of psychosis emphasize the role of attentional disturbances and inappropriate incentive learning in the development of delusions. These models highlight a pre-psychotic period in which the patient experiences perceptual and attentional disruptions. Irrelevant details and numerous associations between stimuli, thoughts and percepts are imbued with inappropriate significance and the attempt to rationalize and account for these bizarre experiences results in the formation of delusions. The present paper discusses delusion formation in terms of basic associative learning processes. Such processes are driven by prediction error signals. Prediction error refers to mismatches between an organism's expectation in a given environment and what actually happens and it is signalled by both dopaminergic and glutamatergic mechanisms. Disruption of these neurobiological systems may underlie delusion formation. We review similarities between acute psychosis and the psychotic state induced by the NMDA receptor antagonist drug ketamine, which impacts upon both dopaminergic and glutamatergic function. We conclude by suggesting that ketamine may provide an appropriate model to investigate the formative stages of symptom evolution in schizophrenia, and thereby provide a window into the earliest and otherwise inaccessible aspects of the disease process.