People give too much credence to eyewitness testimony, especially when it affirms what they want to believe. This is so even with people who fully understand and even agree with the results of psychological experiments that show how unreliable it can be.
I'll write here a somewhat comprehensive list of reasons why eyewitness testimony is unreliable and, in fact, almost completely useless. (That's not to say that eyewitness testimony is never useful in any context; the point is that it shouldn't be relied on. At the very most it can be used as a starting point for further study, but nothing more. Conclusions should not be drawn from it, nor is eyewitness testimony really compelling evidence in any situation, regardless of what other forms of evidence exist.)
I'll divide the reasons into two major categories: Dishonest eyewitnesses and honest eyewitnesses.
1. Dishonest eyewitnesses
For some reason when people want to believe in something (such as that Earth is regularly visited by intelligent extraterrestrial lifeforms), they tend to suspend criticism of eyewitnesses that support their beliefs, especially when the eyewitness has authority or is otherwise famous, influential or charismatic (or even if other people consider him or her as such).
Why would people lie about things like UFO's? Many reasons.
- Money and fame
This is the most obvious one, yet still surprisingly often dismissed by aficionados. Yes, many, many people lie, fabricate and invent stories for the sole reason of monetary gain or fame. They are purely con artists. When they are good at it, they can tell stories that are so convincing to eager ears that the aficionados will defend the sincerity of the con artist to the end.
And these con artists don't need to be nobodies. They can be important or competent people in different fields. The popular depiction of a con artist is some nobody high school dropout who has no expertise in anything particular, no education, no job, no titles or ranks of any merit, and who simply is in it for a quick buck. However, there are con artists in all kinds of fields. Some of them may be highly educated top scientists, some of them may be high ranked military officers, or be in all kinds of important positions. Usually they have found that they can use their position or rank to bolster their lies, and they abuse it to the maximum.
(This is actually a problem in science, but the scientific method has a quite good way of pruning out cons from actual trustworthy results: The rigorous peer reviewing process. This method is quite good, and you can expect cons to never pass this process, and thus you should always check that.)
- Attention seeking
Yes, many people fabricate stories eg. about them having been abducted by aliens for the simple reason of grabbing attention from the ufology community. They like the attention they get, and they want to belong. They want to feel special and be noticed. They like seeing their names in books and documentaries.
Usually these people will maintain to their graves their honesty, no matter how much their story is put into question. These people often would feel terribly ashamed of getting caught fabricating stories and lying. When such a person has a proper empathetic personality, they can be extremely convincing.
- Lying for the cause
Some people have a deluded sense of "camaraderie" for their fellow believers, and want to support "the cause" and promote their beliefs. They are convinced that if enough people have experienced the phenomenon (such as seeing UFO's or having been abducted), that will help bringing it to the attention of the wider public. In their minds, even if they aren't fully aware of it, they think that if they can do their part to promote the movement, everything helps.
They may not be fully aware of it, but at a subconscious level the rationale goes something like this: "Ok, maybe I really didn't see anything abnormal or wasn't really abducted by anything, but that doesn't really matter. It happens to a lot of people and it could very well happen to me; so it's not really lying per se. The fact that it happens is so certain that it could just as well have happened to me directly, so it's not really a lie. I want to be supportive of the group and the cause, so I'll add my part to promoting it."
And, quite naturally, getting recognition from others helps.
- Embellishing honest experience
Sometimes a person who has truly experienced something listed below in the next section, will nevertheless "enhance" their story with embellishments and fabrications to make it more believable. They will add details that they didn't actually experience, and fill in the gaps with such invented embellishments. This often overlaps a lot with the previous reason (ie. in their minds they think that they aren't really lying; they are just telling it how it probably happened, even if not every single minute detail is something that they remember clearly.)
- Diverting attention from the true explanation
This one dwells more on the "governmental conspiracy" land, but it's not absolutely impossible that at least some UFO stories have been fabricated to divert attention away from the actual explanation. Of course I don't know if this has ever happened nor do I have any kind of evidence of it, and thus it should most definitely be taken with a grain of salt, but I wouldn't consider it absolutely ludicrous and impossible. It might be that eg. the military of many governments don't mind steering curious people off tracks from their secret military projects. (This would have the double benefit of both diverting the attention of ufologists away from the actual project, and to discredit the existence of the whole project from the rest of the public who will simply think that it's another ludicrous ufo story.)
Of course if this has ever happened, it's probably extremely rare, but it is a possibility.
2. Honest eyewitnesses
Not all eyewitnesses are deliberately lying. They may be completely honest and convinced of what they are saying. It's just that the human mind is so easily confused that what they are saying may well not correspond to reality. There are many reasons for this.
The human brain has a complex pattern recognition system. This system is actually essential for our survival. It's what helps us distinguishing the type of objects, recognize people, etc. Without it we couldn't live for long.
The thing is, our pattern recognition system is in some aspects "too good". It makes us see patterns where there are none, especially when we don't know what we are looking at. A random blob of colors might look like a face. A tree with a funny shape might look like a person when looked from a certain angle. A strange object in the sky might look like a flying device.
- Misinterpreting strange phenomena
Closely related to the previous, people often try to figure out the meaning of strange phenomena that they don't understand. Oftentimes they come to the wrong conclusion based on insufficient knowledge and experience on the thing being witnessed.
Ironically, being an expert on one particular subject may aggravate the misinterpretation of an unknown phenomenon that's unrelated to that subject. For example, a military pilot who has been trained to spot, recognize and report enemy vehicles and devices, might well be an ironically poor judge when interpreting something that's not any of that. Since they have been trained to see and recognize eg. flying vehicles, they might misinterpret an unknown aerial phenomenon as such, when in fact it isn't. Ironically, the more trained you are in one particular field might make you a less reliable eyewitness for unrelated phenomena.
Yes, interpreting dreams as real events is quite common in this vast world. Some people recognize them and remember them as dreams, but nevertheless still attribute more significance to them than merely that. Some kind of connection to the real world, as if the dream reflected something equivalent that really happened while the person was dreaming. Others outright misremember a dream as being a real event. These people are seldom willing to even believe that this kind of mistake can happen to them.
Minor hallucinations are much more common than most people know or understand. Most of these (perfectly normal) hallucinations happen most often when a person is either falling asleep or waking up (and, in fact, these hallucinations are quite closely connected to dreaming.)
Many people have experienced them at least once during their lives. For example, they may be snoozing off, when suddenly they are absolutely and completely certain that somebody else is in the room with them, even though there shouldn't be anybody in the house. They get very startled, until they wake up completely and find out there wasn't really anybody there.
In a few cases some of these people experience so-called sleep paralysis. This is when the brain is "half asleep" and has basically "turned off" muscle control, so the person is unable to move, even though they are half awake. Sleep paralysis episodes are often accompanied with strong hallucinations. It's not uncommon in these cases for the person to hallucinate about seeing other people or similar things in the room with them.
Most people understand these hallucinations (with or without sleep paralysis) for what they are: basically just bad dreams. However, other people over-interpret them and believe them to have been real events.
- False memories
False memories are much more common than people like to believe.
Over the years the details of some event becomes harder to remember accurately, and we tend to fill in the gaps with our imaginations. We may then start believing that these embellishments are what really happened.
Sometimes an event didn't really happen at all, but we just eg. imagined it, or dreamed it. Years later we misremember it and think that it was an actual event. Sometimes it's something that we read somewhere, saw on television, or a friend told us, and again many years later we misremember, and think that it was something that happened to us personally, when in fact it wasn't.
A surprising amount of "first hand" eyewitnesses actually aren't. Instead, they were told about the event by somebody, or they read about it, and they imagined the event in their heads as it was being told to them, and many years later they mistakenly remember this imagined version to have been an actual first-hand experience.
The story told by "second hand" eyewitnesses is often extremely unreliable. We are not machines that can repeat perfectly what has been told to us. Instead, when someone tells us something, we form a mental picture of it, filling in the blanks. When we later retell the story, we don't repeat the original words, but instead we describe the mental picture we got from it... including all the filled-in blanks and embellishments that our imagination created. This is one of the most common ways for stories to become distorted, even when nobody is actually deliberately lying.
- Mental illness
Let's face it, in some cases some people really are psychologically not well, and believe in all kinds of things that are nothing more than the product of their troubled minds. In some cases it may not be apparent to others, especially people who are not close to the person, that the person is actually mentally ill. As much as we would not want for this to be true, it does happen.