Newt Gingrich's likelihood of winning the Republican nomination plummeted in the prediction markets from nearly 40 percent midday on Tuesday to about 20 percent midday on Thursday, holding at 19.6 percent as of this writing. Gingrich still has a large lead in Real Clear Politics' aggregated trend of national Republican polls with 33.2 percentage points to 22.7 percentage points for Mitt Romney and 10.0 percentage points for Ron Paul. Gingrich's abrupt drop in the prediction markets is all about concerns over his strength in Iowa.
The Iowa Caucus has fallen back into a dead heat. A PPP poll, released on Tuesday, gives Gingrich a slim 1 percentage point lead over Ron Paul, and a Rasmussen poll released Thursday gives Romney a 1 percentage point lead over Gingrich. Both results fall within the margin of error.
The chart shows, side by side, Gingrich's likelihood of winning (1) the Republican nomination, and (2) the Iowa Caucus. As you can see, his prospects nationally are intimately tied to his showing in Iowa. As his lead in Iowa collapsed following the PPP poll, his national strength waned in near lock step.
If Gingrich loses Iowa to Paul, Paul is highly likely to become the anyone-but-Romney candidate. The media, money, and, consequently, support would drain out of Gingrich's campaign. He does not have the money or ground game to run a longshot campaign if he loses Iowa.
If he loses Iowa to Romney, his likelihood of victory in the Republican nomination becomes extremely small. Romney's already commanding 77.4 percent chance of winning New Hampshire would, if anything, rise. And should Romney win both Iowa and New Hampshire, there's a good chance he would cruise to a quick victory. There is a possible outcome where Gingrich emerges from a loss in Iowa as a much weaker anyone-but-Romney candidate, but more likely Jon Huntsman or Paul would fill that role if Romney doesn't sweep.
Thus, almost all of Gingrich's current 19.6 percentage point chance of winning the nomination is predicated on his first winning in the Hawkeye state. If he does reverse his slide and hold on to win Iowa, I conclude from prediction market data that he has a 2 in 3 likelihood of winning the Republican nomination. This 2 in 3 likelihood has remained fairly consistent over time. Thus, as his likelihood of wining Iowa has fallen to 29.4 percent, his likelihood of winning the Republican nomination has fallen to 19.6 percent.
Last night's debate had little influence on the race. In the interest of full disclosure, I was traveling to an academic conference and did not get to watch it. But that gives me the perspective of the vast majority of the Republican electorate that learns about debates through the lens of the media. The media reports indicate that Gingrich, under heavy attack particularly from Michele Bachmann, did a decent job in holding his composure and his position. That is seen in the prediction markets' muted response following the debate.
Yet, in declaring Romney the clear frontrunner once again, the prediction market had already spoken before the debate. Follow along on PredictWise for real-time likelihoods of the Republican nomination and the individual Republican primaries.
David Rothschild is an economist at Yahoo! Research. He has a Ph.D. in applied economics from the Wharton School of Business at the University of Pennsylvania. His dissertation is in creating aggregated forecasts from individual-level information. Follow him on Twitter @DavMicRot and email him at firstname.lastname@example.org.
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