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Social cognitive impairments, including theory of mind (ToM), in schizophrenia more strongly predict functional outcomes than psychotic symptoms or nonsocial cognitive deficits. Despite their clinical importance, current medications do not improve these deficits. The current study investigated the hypothesis that oxytocin, a neuropeptide implicated in social behavior, would normalize neural abnormalities in schizophrenia during ToM, and that this normalization would correlate improvement in ToM behavior. In this cross-over, double-blind, and placebo-controlled functional magnetic resonance imaging study, a single dose of 40 IU of oxytocin was administered via nasal spray to male individuals with a schizophrenia spectrum disorder (schizophrenia and schizoaffective disorder, n = 23) and healthy controls (n = 25). Participants completed two ToM tasks in the scanner, the False Belief and Person Description tasks. During both tasks, on placebo day, schizophrenia was associated with reduced accuracy, hypo-activity in the right temporo-parietal junction (rTPJ; extended into the posterior superior temporal sulcus), and hypo-connectivity between the rTPJ and medial prefrontal cortex (mPFC) compared to healthy controls. Oxytocin, relative to placebo, significantly increased accuracy and rTPJ activation for ToM but not control stories in schizophrenia. Furthermore, a significant positive correlation was found between oxytocin induced increases in rTPJ activity and accuracy, indicating that oxytocin improved rTPJ activity in schizophrenia predicted behavioral improvement. Oxytocin also significantly improved connectivity between rTPJ and mPFC in schizophrenia. These findings suggest that rTPJ activity during ToM might be a potential neural target for the treatment of social cognitive deficits in schizophrenia.