Have you ever noticed that some of the images or events or people you see in your dreams are images, events or people you saw last week? Recall the dream you had last night. Now recall three or four images from that dream. Now ask your self have you seen any of those images before? If so when did you see them? It turns out that when people are asked these simple questions about their dreams and their memories they report that most of the images in their dreams come from the previous day (Freud referred to this a day residue) or from one week prior to the dream. This latter week-long lag is known as the dream lag effect. The idea is that it takes about a week for certain types of experiences to be encoded into long term memory. As the encoding process is proceeding some of the images involved in the consolidation process will turn up in a dream. In short, you can actually see images being encoded into long term memory by paying attention to your dreams!
The term dream-lag effect was proposed in 1989 by Nielsen and Powell (Nielsen & Powell, 1989). Since then the effect has been replicated (Nielsen et al., 2004; Blagrove et al., 2010). Memory theorists suggest that the hippocampus takes events from the previous day, selects some to be consolidated into long term memory and then begins to transfer these over to the neocortex for permanent storage. That transfer process takes about a week. Dreaming may thus participate in the relocation of memory storage from hippocampus to neocortex over time.
References
Blagrove, M., Henley-Einion, J., Barnett, A., Edwards, D., & Heidi, S. C. (2010). A replication of the 5-7day dream-lag effect with comparison of dreams to future events as control for baseline matching. Consciousness and Cognition, in press.
Nielsen, T. A., Kuiken, D., Alain, G., Stenstrom, P., & Powell, R. (2004). Immediate and delayed incorporations of events into dreams: further replication and implications for dream function. Journal of Sleep Research, 13, 327-336.
Nielsen, T. A. & Powell, R. A. (1989). The "dream-lag" effect: A 6-day temporal delay in dream content incorporation. Psychiatric Journal of the University of Ottawa, 14, 561-565.
Nielsen, T. A. & Powell, R. A. (1992). The day-residue and dream-lag effects: A literature review and limited replication of two temporal effects in dream formation. Dreaming, 2, 67-77.