This paper explores how the lay theory approach provides a framework beyond previous stereotype/prejudice research to understand dynamic personality processes in interracial/ethnic contexts. The authors conceptualize theory of race within the Cognitive-Affective Personality System (CAPS), in which lay people's beliefs regarding the essential nature of race sets up a mind-set through which individuals construe and interpret their social experiences. The research findings illustrate that endorsement of the essentialist theory (i.e., that race reflects deep-seated, inalterable essence and is indicative of traits and ability) versus the social constructionist theory (i.e., that race is socially constructed, malleable, and arbitrary) are associated with different encoding and representation of social information, which in turn affect feelings, motivation, and competence in navigating between racial and cultural boundaries. These findings shed light on dynamic interracial/intercultural processes. Relations of this approach to CAPS are discussed.