Humans’ social groups share some features with those of our close primate relatives. However, the importance of cultural variation in delimiting ethnic groups represents a novel element of social structure that fundamentally changed the nature of our social lives and likely posed new adaptive challenges in our lineage. Human social cognition cannot be understood without understanding the cultural evolution of landscapes to which our cognition has to respond (both over evolutionary and developmental time scales). An evolutionary framework that considers both our shared ancestry with group-living apes and the essential role of cultural evolution in creating ethnic phenomena can help us develop a functional taxonomy of intergroup perceptions and motivations. We suggest several processes are often conflated when discussing ethnic phenomena, even though it is unlikely that humans evolved unitary psychological mechanisms for reasoning about these. For example, ethnic categorization, components of essentialism, inter-ethnic avoidance, and intra-ethnic cooperation can arise due to different selection pressures and be independent of each other, although they can feedback on each other in important ways. We provide a functionalist evolutionary framework for investigating these aspects of ethnicity and deriving predictions about them.