Computational models in cognitive neuroscience should ideally use biological properties and powerful computational principles to produce behavior consistent with psychological findings. Error-driven backpropagation is computationally powerful and has proven useful for modeling a range of psychological data but is not biologically plausible. Several approaches to implementing backpropagation in a biologically plausible fashion converge on the idea of using bidirectional activation propagation in interactive networks to convey error signals. This article demonstrates two main points about these error-driven interactive networks: (1) they generalize poorly due to attractor dynamics that interfere with the network's ability to produce novel combinatorial representations systematically in response to novel inputs, and (2) this generalization problem can be remedied by adding two widely used mechanistic principles, inhibitory competition and Hebbian learning, that can be independently motivated for a variety of biological, psychological, and computational reasons. Simulations using the Leabra algorithm, which combines the generalized recirculation (GeneRec), biologically plausible, error-driven learning algorithm with inhibitory competition and Hebbian learning, show that these mechanisms can result in good generalization in interactive networks. These results support the general conclusion that cognitive neuroscience models that incorporate the core mechanistic principles of interactivity, inhibitory competition, and error-driven and Hebbian learning satisfy a wider range of biological, psychological, and computational constraints than models employing a subset of these principles.