People perceive and conceive of activity in terms of discrete events. Here the authors propose a theory according to which the perception of boundaries between events arises from ongoing perceptual processing and regulates attention and memory. Perceptual systems continuously make predictions about what will happen next. When transient errors in predictions arise, an event boundary is perceived. According to the theory, the perception of events depends on both sensory cues and knowledge structures that represent previously learned information about event parts and inferences about actors' goals and plans. Neurological and neurophysiological data suggest that representations of events may be implemented by structures in the lateral prefrontal cortex and that perceptual prediction error is calculated and evaluated by a processing pathway, including the anterior cingulate cortex and subcortical neuromodulatory systems.