Making big bets on Iowa: Gingrich and Perry, not Romney

After months of speculation over how much effort Mitt Romney will put into winning in the Iowa caucus, the Huffington Post is declaring him "All in." Romney will spend Friday in New Hampshire before coming back to Iowa on Saturday and staying through the Tuesday caucuses. Previously, some observers assumed he would stay another day or two in the friendly company of New Hampshirites.

It's extremely likely that Romney will win New Hampshire, regardless of where he spends his time over the next few days or how he performs in Iowa, so spending a little more time in Iowa isn't much of a risk for Romney. Consider the comparison below of insurgent Newt Gingrich's likelihood of winning in Iowa (black) against Romney's likelihood in New Hampshire (red) and in Iowa (navy). At the height of Gingrich's surge around the beginning of December, when Romney's likelihood in Iowa was as low as 10 percent, Romney never dipped below a 70 percent chance of winning New Hampshire. He is currently resting comfortably at an 85.4 percent likelihood, using prediction market data from Betfair and Intrade.

Romney's greatest threat in New Hampshire may be Ron Paul, but Paul is only a threat to Romney in the Granite State if he carries Iowa; thus, there's a huge potential benefit for Romney to spend time and money in Iowa. The expectations for Paul in Iowa (dark green) have surged in recent weeks -- a few days ago he peaked at over 50 percent to win. The higher the expectations are of victory, the larger the costs of defeat. Anything short of an Iowa victory would cause a massive downward shift in momentum for Paul.

Sources: Betfair and Intrade

To say Romney is "all in" in Iowa suggests he can't afford to lose the state. He may be throwing a few more chips in the pot, but his opponents are actually more "all in" than he is.

Gingrich, whose campaign coffers have never been overflowing, is spending $500,000 on ads in Iowa. Gingrich is still the frontrunner in the polls; the Real Clear Politics aggregated poll trend has him up 1.8 percentage points over Romney. Yet, in the prediction markets and Yahoo's Signal, where he was never the frontrunner, he is now fading dramatically. If he does well in Iowa he may be able to replenish his war chest and make a strong primary run, but a bad loss may be financially devastating.

Perry has shifted to the extreme position on abortion; he now states that abortion is not justified even in cases concerning rape, incest, or possible death of the pregnant woman. His campaign believes that this position will get traction in Iowa, where social conservatives dominate the caucuses, but there's no question that his position will challenge his appeal with the general electorate if he gets through Iowa.

Gambling is about demonstrating confidence in potential wins and losses. Romney is making an investment with a huge potential upside and small potential cost. For Gingrich and Perry a poor showing in Iowa followed by a beating in New Hampshire would leave both limping and bleeding heading into South Carolina; they have serious costs if their bets do not succeed.

Follow along on PredictWise for the real-time likelihood 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

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