This paper provides a conceptual analysis of the endophenotype (EP) construct that is having an increasing role in genetic strategies for unraveling the etiology of psychiatric disorders (PDs). We make six major points illustrated through the method of path analysis. First, it is important to distinguish between mediational and liability-index (or 'risk indicator') models for EP, as only the former requires genetic risk for PD to pass through EP. Second, the relative reliability of EP and PD can have a critical role in the interpretation of results. Ignoring them can lead to substantial errors of inference. Third, we need to consider bidirectional relationships between an EP and a PD, and the possibility that genetic effects on PD are only partially mediated by EP. Fourth, EP models typically assume that all genetic effects that have an impact on EP also alter risk for PD. However, among the genetic influences on EP and PD, it is also plausible that some will influence only EP, some only PD and some both. Fifth, we should also consider models incorporating multiple EPs and PDs, which can be well captured by multivariate genetic methods. Sixth, EPs may also reflect the impact of the environment on risk for PDs. The EP concept has important potential lessons for etiological research in PDs that can be optimized by considering it as a special case of a broader set of multivariate genetic models, which can be fitted using currently available methodology.