Circuit Breaker

A mechanism to pause trading in a prediction market to prevent rapid price distortions from herd behavior or manipulation.

What is Circuit Breaker?

A circuit breaker in prediction markets is a design feature that temporarily halts trading when prices move too rapidly, often due to herd behavior or manipulation, to stabilize the market and allow rational reassessment. As Scott Kominers and Alex Tabarrok mention in the transcript, circuit breakers, inspired by stock markets, can “slow contagion” by limiting quick entries or exits, giving participants time to evaluate new information, such as a prominent poll during the 2024 election, before prices overreact.

For example, if a major public signal (e.g., a poll) triggers a surge in digital asset trades, a circuit breaker pauses trading to prevent herding from skewing prices away from true probabilities. This is particularly critical in thin markets, where a single large trader can disproportionately influence prices, as noted in the transcript’s discussion of manipulation attempts. Blockchain-based markets can implement circuit breakers via smart contracts, ensuring automated, transparent enforcement.

Circuit breakers enhance the reliability of prediction markets as public goods by maintaining accurate information aggregation, especially for high-stakes forecasts like elections or corporate decisions. They complement other design features, like decentralized oracles, to ensure markets reflect true collective beliefs rather than transient distortions.