To examine the contribution of "values-based reasoning" in evaluating older adults' capacity to make medical decisions. Older men with schizophrenia (n=20) or dementia (n=20), and a primary care comparison group (n=19), completed cognitive and psychiatric screening and an interview to determine their capacity to make medical decisions, which included a component on values. All of the participants were receiving treatment at Veterans Administration (VA) outpatient clinics. Participants varied widely in the activities and relationships they most valued, the extent to which religious beliefs would influence healthcare decisions, and in ratings of the importance of preserving quality versus length of life. Most participants preferred shared decision making with doctor, family, or both. Individuals with schizophrenia or dementia performed worse than a primary care comparison group in reasoning measured by the ability to list risks and benefits and compare choices. Individuals with dementia performed comparably to the primary care group in reasoning measured by the ability to justify choices in terms of valued abilities or activities, whereas individuals with schizophrenia performed relatively worse compared to the other two groups. Compared to primary care patients, participants with schizophrenia and with dementia were impaired on the ability to explain treatment choices in terms of valued relationships. Medical decision making may be influenced by strongly held values and beliefs, emotions, and long life experience. To date, these issues have not been explicitly included in structured evaluations of medical decision-making capacity. This study demonstrated that it is possible to inquire of and elicit a range of healthcare related values and preferences from older adults with dementia or schizophrenia, and individuals with mild to moderate dementia may be able to discuss healthcare options in relation to their values. However, how best to incorporate a values assessment into a structured capacity evaluation deserves further research attention.