In addition to labeling people as mentally ill, the law often labels them as incompetent to exercise certain rights or to play particular roles. Indeed, under the broad dicta of Zinermon v. Burch, incompetency labeling may increase dramatically. This article uses principles of social and cognitive psychology to examine the effects of incompetency labeling. Such labeling is shown to produce potentially serious adverse effects. It often alters the way others view and react to the labeled individual and affects his or her self-esteem and self-concept in ways that may inhibit performance, diminish motivation, and depress mood. After analyzing those negative side effects of incompetency labeling, the article examines the implications of these findings for mental health law and makes a number of proposals for changing the law in order to avoid or minimize these adverse effects.