We use two unique Iraq data sets to show how fear and uncertainty served to motivate the self‐fulfilling, neighborhood‐specific forces that followed the U.S.‐led invasion of Iraq. Sectarian criminal violence by armed Shia and Sunni organizations created a situation of ethnic/religious cleansing that reconfigured much of Baghdad. The article focuses on the case of how one particularly violent group, the Mahdi Army, mobilized through the coercive entrepreneurship of Muqtada al‐Sadr, used organized crime tactics of killing, torture, rape, kidnapping, harassment, threats, and forced displacement in a widespread and systematic attack against civilians that forced Sunni residents from their Baghdad neighborhoods. Ordinary Iraqis were victims of an amplified “self‐fulfilling prophecy of fear” that created the momentum for massive sectarian displacement in the battle for Baghdad. We demonstrate that there is a neighborhood specific effect of early postinvasion neighborhood fear net of intervening violence on displacement three years later, following the Al‐Qaeda Samara Shrine attack, confirming an effect of a self‐fulfilling prophecy of fear in the neighborhoods of Baghdad that compounded in a self‐reinforcing way. The changed demography of Baghdad was effectively consolidated by the later surge of U.S. forces that left in place the territorial gains made by the Shia‐led Mahdi Army at the expense of former Sunni residents. We conclude that this continues to matter because the resulting grievances have contributed to renewed violence.