Understanding the mechanisms by which sensory neurons encode and decode information remains an important goal in neuroscience. We quantified the performance of optimal linear and nonlinear encoding models in a well-characterized sensory system: the electric sense of weakly electric fish. We show that linear encoding models generally perform better under spatially localized stimulation than under spatially diffuse stimulation. Through pharmacological blockade of feedback input and spatial saturation of the receptive field center, we show that there is significantly less synaptic noise under spatially diffuse stimuli as compared with spatially localized stimuli. Modeling results suggest that pyramidal cells nonlinearly encode sensory information through shunting in their dendrites and clarify the influence of synaptic noise on the performance of linear encoding models. Finally, we used information theory to quantify the performance of linear decoders. While the optimal linear decoder for spatially localized stimuli could capture 60% of the information in pyramidal cell spike trains, the optimal linear decoder for spatially diffuse stimuli could only capture 40% of the information. These results show that nonlinear decoders are necessary to fully access information in pyramidal cell spike trains, and we discuss potential mechanisms by which higher-order neurons could decode this information.