Alderdice was born to the Rev. David Alderdice and Annie Margaret Helena Shields. He was educated at Ballymena Academy and the Queen's University Belfast (QUB) where he studied medicine and qualified in 1978. In 1977, he married Joan Hill, with whom he has two sons and one daughter. He worked part-time as a consultant psychiatrist in psychotherapy in the NHS from 1988 until he retired from psychiatric practice in 2010. He also lectured at Queen's University's Faculty of Medicine between 1991 and 1999.
Alderdice claims a distant relationship to John King, a nineteenth-century Australian explorer and the sole survivor of the Burke and Wills expedition.
The Alliance Party was formed in 1970 as an alternative to sectarian politics. Alderdice was on the Executive Committee of the party between 1984 and 1998, Chair of the Policy Committee between 1985 and 1987, the party Vice-chair in 1987, before becoming the party leader ahead of the 1987 general election, and contested Belfast East for the party in 1987 and 1992. He received 32.1% of the vote in 1987, the highest percentage achieved by Alliance in an individual seat in a Westminster election until Naomi Long's historic victory for the party in Belfast East in the 2010 general election. In 1988, in Alliance's keynote post-Anglo Irish Agreement document, "Governing with Consent", Alderdice called for a devolved power-sharing government based on a voluntary coalition elected by a qualified majority vote. Throughout the late 1980s and early 1990s, Alliance's vote across Northern Ireland stabilised at between 6% and 8%.
Alderdice once again contested Belfast East in the 1992 general election. He led the Alliance Delegation to the Forum for Peace and Reconciliation at Dublin Castle and the Northern Ireland Multiparty Talks, and was a member of the Northern Ireland Forum.
Alderdice was willing to talk with Sinn Féin, after the IRA called a ceasefire in 1994, when others in the unionist community regarded such discussions as unacceptable.
He was elected to the Northern Ireland Assembly for Belfast East in 1998 and became the Assembly's first speaker, serving until 2004. Mo Mowlam said that Alderdice's "political and parliamentary experience mean that he is well suited to carry out this role". Alderdice was a Belfast City Councillor from 1989 until 1997. He resigned as party leader in 1998 to take the position of Speaker. He was a member of the Independent Monitoring Commission from 2004 to 2011.
Alderdice was created a life peer on 8 October 1996 as Baron Alderdice, of Knock in the City of Belfast, and was one of the youngest ever life peers. He sits in the House of Lords as a Liberal Democrat. On 10 June 2010, he was elected to the new position of Convenor of the Liberal Democrat Peers, a role in which he chairs the Liberal Democrat Parliamentary Party in the House of Lords.
He was elected President of Liberal International in 2005 and served until Liberal International's Cairo congress in 2009. He was succeeded by Dutch politician Hans van Baalen.
Alderdice has been awarded several honours: the John F Kennedy Profiles in Courage Award in 1998; the W. Averell Harriman Democracy Award in 1998; the Silver Medal of Congress of Peru in 1999 and 2004; the Medal of Honour, College of Medicine of Peru in 1999; and the Freedom of the City of Baltimore in 1991. He is an elder in the Presbyterian Church in Ireland.
In 2001 he was made an honorary fellow of the Royal College of Psychiatrists and has also been awarded an honorary doctorate in law from Robert Gordon University.