Alterations in the balance between prior expectations and sensory evidence may account for faulty perceptions and inferences leading to psychosis. However, uncertainties remain about the nature of altered prior expectations and the degree to which they vary with the emergence of psychosis. We explored how expectations arising at two different levels – cognitive and perceptual – influenced processing of sensory information and whether relative influences of higher and lower level priors differed across people with prodromal symptoms and those with psychotic illness. In two complementary auditory perception experiments, 91 participants (30 with first episode psychosis, 29 at clinical risk for psychosis, and 32 controls) were required to decipher a phoneme within ambiguous auditory input. Expectations were generated in two ways: an accompanying visual input of lip movements observed during auditory presentation, or through written presentation of a phoneme provided prior to auditory presentation. We determined how these different types of information shaped auditory perceptual experience, how this was altered across the prodromal and established phases of psychosis, and how this relates to cingulate glutamate levels assessed by magnetic resonance spectroscopy. The psychosis group relied more on high level cognitive priors compared to both healthy controls and those at clinical risk for psychosis, and more on low level perceptual priors than the clinical risk group. The risk group were marginally less reliant on low level perceptual priors than controls. The results are consistent with previous theory that influences of prior expectations in psychosis in perception differ according to level of prior and illness phase.General scientific summaryWhat we perceive and believe on any given moment will allow us to form expectations about what we will experience in the next. In psychosis, it is believed that the influence of these so-called perceptual and cognitive ‘prior’ expectations on perception is altered, thereby giving rise to the symptoms seen in psychosis. However, research thus far has found mixed evidence, some suggesting an increase in the influence of priors and some finding a decrease. Here we test the hypothesis that perceptual and cognitive priors are differentially affected in individuals at-risk for psychosis and individuals with a first episode of psychosis, thereby partially explaining the mixed findings in the literature. We indeed found evidence in favour of this hypothesis, finding weaker perceptual priors in individuals at-risk, but stronger cognitive priors in individuals with first episode psychosis.