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Fish olfaction expert Dr Kelly Wright answers this question. Kelly's PhD investigated the sense of smell in marine fish larvae.
Olfaction (or smell) is a major sense for fishes, used for many different functions including location of a food source, predator avoidance, finding their 'home' area or a spawning ground, recognition of kin group members and identification of fish of the same species. It is also used in the reproductive behaviours of many fish species.
The olfactory receptors in fishes are located in pits on the snout, anterior to the eye. These olfactory pits have both an incurrent and excurrent naris (or opening) which directs water flow over a folded sensory epithelium that lines the pits. Each sensory epithelial fold is a lamellae and the entire epithelium with its multiple lamellae is the olfactory rosette. Water enters the nasal pits via the flow of water through the incurrent naris and any chemical stimulus carried in the water comes into contact with the olfactory rosette, triggering a neural response that is transmitted to the olfactory lobe of the brain.
There is much variability among fish species in both the shape of the olfactory rosette and number of lamellae present. For example, sygnathids (seahorses and pipefishes) and gobiesocids (clingfishes) have no olfactory lamellae, some salmonids, minnows and pikes have fewer than 20, whilst some eel species have as many as 90. Generally, the more lamellae a fish possess, the better they smell. Therefore, there is a wide range of olfactory abilities reported for different species of marine and freshwater fishes.