Objective Impaired capacity to make decisions in everyday life and situations of medical treatment is an inevitable consequence of the cognitive decline in Alzheimer's disease (AD). The objective of this study was to identify the most powerful cognitive component(s) that best predicted medical decision‐making capacity (MDMC) in patients with AD and mild cognitive impairment. Method Three groups of subjects participated in the study: patients with AD (n = 20), mild cognitive impairment (n = 21), and healthy control subjects (n = 33). MDMC was assessed by the linguistic instrument for medical decision‐making (LIMD) and related to demographics and 27 cognitive test measures. Results The cognitive tests were found to aggregate into four components using a principle component analysis. The four components, which correspond to verbal knowledge, episodic memory, cognitive speed, and working memory, accounted for 73% of the variance in LIMD according to a stepwise regression analysis. Verbal knowledge was the most powerful predictor of LIMD (beta = 0.66) followed by episodic memory (beta = 0.43), cognitive speed (beta = 0.32), and working memory (beta = 0.23). The best single test as shown by the highest correlation with LIMD was Reading speed (R = 0.77). Conclusion Multiple factors are involved in MDMC in subjects with cognitive impairment. The component of verbal knowledge was the best predictor of MDMC and Reading speed was the most important single cognitive test measurement, which assessed both rapid Reading and understanding of text. Copyright © 2014 John Wiley & Sons, Ltd.