<p>Laughter is a signature of social connection, thought to communicate a shared understanding of nonseriousness. Building on this idea, the present work examines whether people laugh more when they perceive similarity with their social partner, or instead, feel more similar when they laugh. Participants (N_dyads = 132) had semi-structured conversations with both a friend and a stranger, discussing ways they were similar to and different from one another. Although conversation topic did not affect overall laughter, friends laughed even more than strangers when discussing their differences. A composite of baseline perceived similarity measures predicted how much dyads laughed and colaughed. Participants laughed more if they felt similar to their partner <i>or</i> if their partner felt similar to them. Partners who laughed more also expressed more shared reality during their conversations (e.g., saying “I agree”) and self-reported greater subjective shared reality afterwards. Laughter and verbal agreement appeared to serve overlapping conversational functions: when laughter occurred, shared reality verbal expressions became less likely in the next two seconds. A subset analysis of friend dyads showed that only <i>perceived</i> similarity—not actual similarity—predicted laughter. However, laughter was not associated with subsequent changes in perceived similarity. In sum, conversational laughter reflects a preexisting sense of similarity and shared understanding, both of which underly social connection.</p>