Over the past decade we witnessed the birth of a new scientific area that lies at the borders of developmental biology, stem cell biology, basic and clinical neuroscience. In vitro disease modeling refers to the approach that exploits the capacity of stem cells for self-renewal and pluripotency by generating specific cell types that are relevant for a given disorder. Based on this method, neurological and psychiatric disorders can be investigated by differentiating stem cells into neurons in a dish, and studying the relevant neuronal populations affected in the pathophysiology of the disorder in terms of specific cellular phenotypes. The advent of induced pluripotent stem cells (IPSCs) has made it possible to reprogram IPSCs from somatic cells of patients carrying specific genetic risk variants, and to analyze the in vitro cellular findings in the context of the clinical picture. Pluripotent stem cell based disease modeling offers an alternative solution for invasive and mostly not performable central nervous system biopsies in neuropsychiatric disorders, and is an appealing laboratory method for studying biomarkers of these disorders and for future drug development. This review summarizes the pluripotent stem cell based disease modeling literature in two important neuropsychiatric disorders, Alzheimer's disease and schizophrenia.