Fiction presents a unique challenge to the developing child, in that children must learn when to generalize information from stories to the real world. This study examines how children acquire causal knowledge from storybooks, and whether children are sensitive to how closely the fictional world resembles reality. Preschoolers (N = 108) listened to stories in which a novel causal relation was embedded within realistic or fantastical contexts. Results indicate that by at least 3 years of age, children are sensitive to the underlying causal structure of the story: Children are more likely to generalize content if the fictional world is similar to reality. Additionally, children become better able at discriminating between realistic and fantastical story contexts between 3 and 5 years of age.