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Sensory experience during development has lasting effects on perception and neural processing. Exposing juvenile animals to artificial stimuli influences the tuning and functional organization of the auditory cortex, but less is known about how the rich acoustical environments experienced by vocal communicators affect the processing of complex vocalizations. Here, we show that in zebra finches (Taeniopygia guttata), a colonial-breeding songbird species, exposure to a naturalistic social-acoustical environment during development has a profound impact on auditory perceptual behavior and on cortical-level auditory responses to conspecific song. Compared to birds raised by pairs in acoustic isolation, male and female birds raised in a breeding colony were better in an operant discrimination task at recognizing conspecific songs with and without masking colony noise. Neurons in colony-reared birds had higher average firing rates, selectivity, and discriminability, especially in the narrow-spiking, putatively inhibitory neurons of a higher-order auditory area, the caudomedial nidopallium (NCM). Neurons in colony-reared birds were also less correlated in their tuning, more efficient at encoding the spectrotemporal structure of conspecific song, and better at filtering out masking noise. These results suggest that the auditory cortex adapts to noisy, complex acoustical environments by strengthening inhibitory circuitry, functionally decoupling excitatory neurons while maintaining overall excitatory-inhibitory balance.