The hippocampus of the brain, scientists at the University College London report, is responsible for our ability to organise the world into separate concepts.
Forming a concept involves selecting the important characteristics of our experiences and categorising them.
The degree to do this effectively is a defining characteristic of human intelligence.
However, not much is known about how conceptual knowledge is created and used in the brain.
Thus, to identify the brain regions responsible, Dharshan Kumaran and colleagues at the Wellcome Trust Centre for Neuroimaging, UCL, showed 25 volunteers, pairs of fractal patterns that represented the night sky and asked them to forecast the weather - either rain or sun - based on the patterns.
Conceptual rules based on the positions and combinations of the patterns governed whether the resulting outcome would be rain or sun, but the volunteers were not told this.
Instead, they rewarded correct predictions with cash prizes, encouraging the volunteers to deduce these conceptual rules.
In an initial learning phase, the different possible combinations were repeatedly shown to the participants, so that they could make their predictions by simply memorising previous outcomes and could also begin to realise that rules based on the positions and combinations of the patterns governed whether the result would be rain or sun.
In a second phase, the volunteers were provided with less information to encourage them to apply the rules they had identified, which made the researchers to separate those volunteers who had formed the concept in the learning phase from those who hadn't.
During both experiments fMRI scanning was used to identify areas of brain activity.
It was found that in the first phase, they could tell if a volunteer would go on to apply concepts in the second phase by the degree of activity in their hippocampus, which is known to be responsible for learning and memory.
In the second phase, activity centred on the ventromedial prefrontal cortex (vMPFC), important in decision-making, was active.
The team concluded that the hippocampus creates and stores concepts, and passes this information onto the vMPFC where it is put to use during the making of decisions.
People with amnesia are also known to have problems forming concepts, so Kumaran is expecting his findings to lead to the development of improved teaching methods and other tools for the treatment of amnesiacs.
The study has been published in the journal Neuron.