Empirical research shows that persons scoring low on psychological adjustment (PA) generally experience large ideal self (IS) versus actual self (AS) discrepancies whereas the reverse is true for high-PA persons. A particularly interesting interpretation of this phenomenon, consistent with a large body of clinical and experimental literature, ascribes it to self-derogation processes in low-PA persons and self-enhancement processes in high-PA persons. This article points out that this derogation/enhancement (D/E) interpretation assumes that people differing in PA level relate and organize the AS and IS judgments in qualitatively different ways. This results in a nonlinear relationship between PA, AS, and IS. Following a definition of the derogation/enhancement interpretation in terms of the relationship between AS, IS, and PA, a methodology for testing this interpretation is presented, and its implications are discussed. It is also shown that the methodology developed with regard to AS, IS, and PA can be used to examine D/E hypotheses involving other variables.