Mixed halide hybrid perovskites, CH₃NH₃Pb(I_1−xBr_x)₃, represent good candidates for low-cost, high efficiency photovoltaic, and light-emitting devices. Their band gaps can be tuned from 1.6 to 2.3 eV, by changing the halide anion identity. Unfortunately, mixed halide perovskites undergo phase separation under illumination. This leads to iodide- and bromide-rich domains along with corresponding changes to the material’s optical/electrical response. Here, using combined spectroscopic measurements and theoretical modeling, we quantitatively rationalize all microscopic processes that occur during phase separation. Our model suggests that the driving force behind phase separation is the bandgap reduction of iodide-rich phases. It additionally explains observed non-linear intensity dependencies, as well as self-limited growth of iodide-rich domains. Most importantly, our model reveals that mixed halide perovskites can be stabilized against phase separation by deliberately engineering carrier diffusion lengths and injected carrier densities.