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This paper hypothesizes that official labeling gives personal relevance to an individual's beliefs about how others respond to mental patients. According to this view, people develop conceptions of what others think of mental patients long before they become patients. These conceptions include the belief that others devalue and discriminate against mental patients. When people enter psychiatric treatment and are labeled, these beliefs become personally applicable and lead to self-devaluation and/or the fear of rejection by others. Such reactions may have negative effects on both psychological and social functioning. This hypothesis was tested by comparing samples of community residents and psychiatric patients from the Washington Heights section of New York city. Five groups were formed (1) first-treatment contact patients, (2) repeat-treatment contact patients, (3) formerly treated' community residents, (4) untreated community cases, and (5) community residents with no evidence of severe psychopathology. These groups were administered a scale that measured beliefs that mental patients would be devalued and discriminated against by most people. Scores on this scale were associated with demoralization, income loss, and unemployment in labeled groups but not in unlabeled groups. The results suggest that labeling may produce negative outcomes like those specified by the classic concept of secondary deviance. [ABSTRACT FROM AUTHOR]