Social anxiety due to rejection sensitivity (RS) exacerbates psychosis-like experiences in the general population. While reduced dorsal anterior cingulate cortex (dACC) activity during social rejection in high schizotypy has suggested self-distancing from rejection, earlier stages of mental processing such as feature encoding could also contribute to psychosis-like experiences. This study aimed to determine the stage of mental processing of social rejection that relates to positive schizotypy. Forty-one healthy participants were assessed for schizotypy and RS. Event-related potential amplitudes (ERPs) were measured at frontal, temporal and parieto-occipital sites and their cortical sources (dACC, temporal pole and lingual gyrus) at early (N100) and late (P300 and late slow wave, LSW) timeframes during rejection, acceptance and neutral scenes. ERPs were compared between social interaction types. Correlations were performed between positive schizotypy (defined as the presence of perceptual aberrations, hallucinatory experiences and magical thinking), RS and ERPs during rejection. Amplitude was greater during rejection than acceptance or neutral conditions at the dACC-P300, parieto-occipital-P300, dACC-LSW and frontal-LSW. RS correlated positively with positive schizotypy. Reduced dACC N100 activity during rejection correlated with greater positive schizotypy and RS. Reduced dACC N100 activity and greater RS independently predicted positive schizotypy. An N100 deficit that indicates reduced feature encoding of rejection scenes increases with greater positive schizotypy and RS. Higher RS shows that a greater tendency to misattribute ambiguous social situations as rejecting also increases with positive schizotypy. These two processes, namely primary bottom-up sensory processing and secondary misattribution of rejection, combine to increase psychosis-like experiences.SCHIZOTYPY AND REJECTION SENSITIVITY 3