The presence of peers increases risk taking among adolescents but not adults. We posited that the presence of peers may promote adolescent risk taking by sensitizing brain regions associated with the anticipation of potential rewards. Using fMRI, we measured brain activity in adolescents, young adults, and adults as they made decisions in a simulated driving task. Participants completed one task block while alone, and one block while their performance was observed by peers in an adjacent room. During peer observation blocks, adolescents selectively demonstrated greater activation in reward‐related brain regions, including the ventral striatum and orbitofrontal cortex, and activity in these regions predicted subsequent risk taking. Brain areas associated with cognitive control were less strongly recruited by adolescents than adults, but activity in the cognitive control system did not vary with social context. Results suggest that the presence of peers increases adolescent risk taking by heightening sensitivity to the potential reward value of risky decisions.