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Modern materialistic science is not sure about the origin and nature of most psychic phenomena including dreams. This information can be found in Vedic scriptures.
Srimad Bhagavatam 6.16.53-54, 7.7.25 or 7.15.61 describes three material states of consciousness:
1. jagrata, awakened state (beta, 14 – 20 Hz)
2. svapna, dreaming state (alfa, 7 – 14 Hz)
3. susupti, deep sleep (theta, 4 – 7 Hz)
Beyond them is the fourth state (turya) which is non-material (SB 6.5.12, 7.9.32, 7,15.54). On this level the Supreme Lord can be perceived. Gaudiya Vaisnavas describe another, fifth state (turyatitah), dimension of love between the jiva and Krsna.
What follows are paraphrases of Vedanta-sutra (by Suhotra Swami) and corresponding Srimad Bhagavatam verses:
Dreams are created by the Supersoul to award the living entity with the results of insignificant karma. (Vs 3.2.1) SB 6.16.55
The Supersoul causes objects of desire to appear in dreams as they do in other situations (e.g. the waking state). (Vs 3.2.2) SB 11.13.32
Dreams are features of the Supreme Lord’s maya. (Vs 3.2.3) SB 11.13.33
Some dreams are omens; sastra and experts so declare. (Vs 3.2.4) SB 10.42.26-27
Objection: When one awakes from dreaming, he knows that his dreams were unreal. Therefore no value should be imparted to dreams.
Reply: The manifestation and the withdrawal of the dream world within the consciousness of the living entity is effected by the Lord. In the same way, bondage and liberation proceed from him also. (Vs 3.2.5) SB 3.7.10-12
The state in which consciousness is focused on the physical body (the waking state) is created by the Supreme Lord. (Vs 3.2.6) SB 6.16.53-54
Different statements in the Upanisads indicate that deep sleep is the result of the soul entering 1) the nadis (subtle channels that pervade the body from the center of the heart), 2) the pericardium, or 3) the Supersoul. The resolution is that the soul sleeps within the bed of the Supersoul, after having entered the palace (the pericardium) through the door of the nadis. (Vs 3.2.7) SB 11.3.35, 1.10.21
Because the Supersoul is the resting place of the soul in deep sleep, it is the Supersoul alone who awakens the sleeping soul. (Vs 3.2.8) SB 3.26.71
[Koran 6.60: “And He is it who takes your souls at night (in sleep), and He who knows what you acquire in the day (…).”] When the living entity awakes from deep sleep, he is the same person. This is certain because of four proofs: 1) the living entity continues his unfinished karma, 2) he retains memory of his identity, 3) the scriptures so describe him as returning to the same body, and 4) he is bound by the scriptural injunctions (i.e. it is enjoined that the jiva cannot attain liberation while in the state of deep sleep, so he is obliged by sastra to return to the body from that state). (Vs 3.2.9) SB 11.3.39, 11.13.27,28
The state of swoon (mugdha) is midway between deep sleep and wakefulness. That is to say, the soul partially attains rest in the Supersoul. (Vs 3.2.10) SB 7.13.5