We studied the utility of a 'vignette method' to assess mental competency for decision making on medical treatment and research participation. A vignette is a description of an imaginary situation in which the subject is asked to decide on a proposed treatment or on participation in research. His or her understanding of the situation and the quality of the reasoning underlying that choice are tested by a short series of questions. Subjects were participants in the Amsterdam Study of the Elderly (AMSTEL), a population-based study on cognitive decline and dementia. The sample consisted of elderly people (70-90 years), who were cognitively intact (n = 176) or had a dementia syndrome (n = 64; mostly Alzheimer disease). Dementia was diagnosed using the Cambridge Examination for Mental Disorders of the Elderly (CAMDEX) schedule. Two vignettes were used as competency assessment instruments. The answers to the vignette questions were summed to form a competency score. The reliability (internal consistency) of this score was 0.82 for both vignettes combined. After dichotomization into competent/incompetent (cutoff at the fifth centile of the control group), the agreement between the vignette method and a physician's judgment of competency was poor (κ = 0.36) in the demented group. There was no agreement whatsoever when subjects with 'minimal dementia' (n = 14) were left out of this analysis (κ = 0.04). As expected, mean competency scores declined with increasing dementia severity. A multiple regression analysis showed that mental competency as measured by the vignette method was determined mainly by recent memory, expressive language, and abstract thinking. In the control group the competency score was only slightly related to education (r = 0.12) and verbal intelligence (r = 0.27). We conclude that the vignette method is a reliable and valid method for the assessment of mental competency in elderly people with cognitive decline. The vignette method is preferred over a physician's judgment, especially in patients with early dementia.