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Sparse coding can improve discrimination of sensory stimuli by reducing overlap between their representations. Two factors, however, can offset sparse coding’s benefits: similar sensory stimuli have significant overlap and responses vary across trials. To elucidate the effects of these 2 factors, we analyzed odor responses in the fly and mouse olfactory regions implicated in learning and discrimination—the mushroom body (MB) and the piriform cortex (PCx). We found that neuronal responses fall along a continuum from extremely reliable across trials to extremely variable or stochastic. Computationally, we show that the observed variability arises from noise within central circuits rather than sensory noise. We propose this coding scheme to be advantageous for coarse- and fine-odor discrimination. More reliable cells enable quick discrimination between dissimilar odors. For similar odors, however, these cells overlap and do not provide distinguishing information. By contrast, more unreliable cells are decorrelated for similar odors, providing distinguishing information, though these benefits only accrue with extended training with more trials. Overall, we have uncovered a conserved, stochastic coding scheme in vertebrates and invertebrates, and we identify a candidate mechanism, based on variability in a winner-take-all (WTA) inhibitory circuit, that improves discrimination with training.