Oxytocin (OT) and arginine vasopressin (AVP) exert robust influence on social affiliation and specific cognitive processes in healthy individuals. Abnormalities in these neuroendocrine systems have been observed in psychotic disorders, but their relation to impairments in behavioral domains that these endocrines modulate is not well understood. We compared abnormalities of OT and AVP serum concentrations in probands with schizophrenia (n = 57), schizoaffective disorder (n = 34), and psychotic bipolar disorder (n = 75); their first-degree relatives without a history of psychosis (n = 61, 43, 91, respectively); and healthy controls (n = 66) and examined their association with emotion processing and cognition. AVP levels were lower in schizophrenia (P = .002) and bipolar probands (P = .03) and in relatives of schizophrenia probands (P = .002) compared with controls. OT levels did not differ between groups. Familiality estimates were robust for OT (h 2 = 0.79, P = 3.97e−15) and AVP (h 2 = 0.78, P = 3.93e−11). Higher levels of OT were associated with better emotion recognition (β = 0.40, P < .001) and general neuropsychological function (β = 0.26, P = .04) in healthy controls as expected but not in any proband or relative group. In schizophrenia, higher OT levels were related to greater positive symptom severity. The dissociation of OT levels and behavioral function in all proband and relative groups suggests that risk and illness factors associated with psychotic disorders are not related to reduced OT levels but to a disruption in the ability of physiological levels of OT to modulate social cognition and neuropsychological function. Decreased AVP levels may be a marker of biological vulnerability in schizophrenia because alterations were seen in probands and relatives, and familiality was high.