Background: Context processing may reflect a specific cognitive impairment in schizophrenia. Whether impaired context processing is observed across psychotic disorders or among relatives of affected individuals, and whether it is a deficit that is independent from the generalized neuropsychological deficits seen in psychotic disorders, are less established. Methods: Schizophrenia, schizoaffective, and psychotic bipolar probands (n = 660), their first-degree relatives (n = 741), and healthy individuals (n = 308) studied by the Bipolar-Schizophrenia Network on Intermediate Phenotypes consortium performed an expectancy task requiring use of contextual information to overcome a prepotent response. Sensitivity for target detection and false alarm rates on trials requiring inhibition or goal maintenance were measured. Results: Proband groups and relatives with psychosis spectrum personality traits demonstrated reduced target sensitivity and elevated false alarm rates. False alarm rate was higher under inhibition vs goal maintenance conditions although this difference was attenuated in schizophrenia and schizoaffective proband groups. After accounting for global neuropsychological impairment, as reflected by the composite score from the Brief Assessment of Cognition in Schizophrenia neuropsychological battery, deficits in schizophrenia and bipolar proband groups were no longer significant. Performance measures were moderately familial. Conclusion: Reduced target detection, but not a specific deficit in context processing, is observed across psychotic disorders. Impairments in both goal maintenance and response inhibition appear to contribute comparably to deficits in schizophrenia and schizoaffective disorder, whereas greater difficulty with response inhibition underlies deficits in bipolar disorder. Yet, these deficits are not independent from the generalized neurocognitive impairment observed in schizophrenia and psychotic bipolar disorder.