In general, dreams are a novel but realistic simulation of waking social life, with a mixture of characters, motivations, scenarios, and positive and negative emotions. We propose that the sharing of dreams has an empathic effect on the dreamer and on significant others who hear and engage with the telling of the dream. Study 1 tests three correlations that are predicted by the theory of dream sharing and empathy: that trait empathy will be correlated with frequency of telling dreams to others, with frequency of listening to others' dreams, and with trait attitude toward dreams (ATD) (for which higher scores indicate positive attitude). 160 participants completed online the Toronto Empathy Questionnaire and the Mannheim Dream Questionnaire. Pearson partial correlations were conducted, with age and sex partialled out. Trait empathy was found to be significantly associated with the frequency of listening to the dreams of others, frequency of telling one's own dreams to others, and attitude toward dreams. Study 2 tests the effects of discussing dreams on state empathy, using an adapted version of the Shen (2010) state empathy scale, for 27 pairs of dream sharers and discussers. Dream discussion followed the stages of the Ullman (1996) dream appreciation technique. State empathy of the dream discusser toward the dream sharer was found to increase significantly as a result of the dream discussion, with a medium effect size, whereas the dream sharer had a small decrease in empathy toward the discusser. A proposed mechanism for these associations and effects is taken from the robust findings in the literature that engagement with literary fiction can induce empathy toward others. We suggest that the dream acts as a piece of fiction that can be explored by the dreamer together with other people, and can thus induce empathy about the life circumstances of the dreamer. We discuss the speculation that the story-like characteristics of adult human dreams may have been selected for in human evolution, including in sexual selection, as part of the selection for emotional intelligence, empathy, and social bonding.