Inductive inference underlies much of human cognition. The essential compon
ent of induction is hypothesis selection based on some criterion of relevan
ce. The purpose of this study was to determine the neural substrate of indu
ctive inference, particularly hypothesis selection, using fMRI. Ten volunte
ers were shown stimuli consisting of novel animals under two task condition
s, and asked to judge whether all the animals in the set were the same type
of animal. In one condition, subjects were given a rule that specified the
criteria for "same type of animal". In the other condition, subjects had t
o infer the rule without instruction. The two conditions were further facto
red into easy and difficult components. Rule inference was specifically ass
ociated with bilateral hippocampal activation while the task by difficulty
interaction was associated with activation in right lateral orbital prefron
tal cortex. We interpret the former in terms of semantic encoding of novel
stimuli, and the latter in terms of hypothesis selection. Thus, we show an
anatomical dissociation between task implementation and task difficulty tha
t may correspond to a critical psychological distinction in the processes n
ecessary for inductive inference.