Why buying cows is just like investing in stocks

This is one piece of news that would please Dinanath Batra and his cow-loving fans: Recent research by a team of economists show that rural Indians investing in cows and buffaloes may be acting quite rationally, overturning earlier research by another set of economists which showed that such investments led to losses, and which hypothesized that such investments could be driven by cultural mores.

The story begins in 2013, when a National Bureau of Economic Research (NBER) working paper, “Continued Existence of Cows Disproves Central Tenets of Capitalism?” by Santosh Anagol, Alvin Etang and Dean Karlan attracted wide attention with its surprising findings on cattle investments in India. Anagol et al. analyzed data on costs incurred and incomes generated by those owning cows and buffaloes in two districts of Uttar Pradesh to come up with startling results: cows and buffaloes generated large negative returns for their owners, at negative 64% and negative 34% respectively, once labour costs were factored in. The authors concluded that the villagers did not behave according to the central tenets of capitalism, and offered a variety of explanations, including cultural and religious ones, to explain the seemingly irrational choice.

Commenting on their research, The Economist asked, “If returns on cattle are so bad, why do households buy them?” It then went to suggest answers, drawing from the NBER paper: “People may not be thinking about economics, of course. Hindus may derive spiritual fulfilment from cow ownership. Households may prefer to produce high-quality milk at home, even if doing so costs more.”

“But the authors (of the research paper) suggest that there may also be sound economic reasoning behind cow ownership”, The Economist wrote. “According to ICRIER, a think-tank, only 7% of Indian villages have a bank branch. That means people lack a formal savings mechanism for their spare cash. And although there are informal ways to save—joining a local savings club, for example, or simply stuffing money under the mattress—owning a cow may be a better option.”

Not all commentators were taken in by the explanations offered by the authors. In a blog post, Daron Acemoglu and James Robinson criticized Anagol et al. for not taking into account the ‘social context’ of the cattle investments.

“Economic theory sometimes portrays people as individuals making decisions completely divorced from their social context,” the blog began. “A long tradition in other social sciences, particularly sociology, finds this unsatisfactory… An example of the problems with examining an economic problem without thinking of how people are embedded in society comes from the new paper “Continued Existence of Cows Disproves Central Tenets of Capitalism?” by Santosh Anagol, Alvin Etang, and Dean Karlan.”

Now, another NBER working paper, aptly titled, “Holy Cows or Cash Cows” by economists Orazio Attanasio and Britta Augsburg questions the central findings of Anagol et al. The duo point to a very simple explanation for the startling results obtained by their peers: drought!

“In computing the return on cows and buffaloes, the authors used data from a single year,” Attanasio and Augsburg write in their recently published research paper. “Cows are assets whose return varies through time. In drought years, when fodder is scarce and expensive, milk production is lower and profits are low. In non-drought years, when fodder is abundant and cheaper, milk production is higher and profits can be considerably higher. The return on cows and buffaloes, like that of many stocks traded on Wall Street, is positive in some years and negative in others. We report evidence from three years of data on the return on cows and buffaloes in the district of Anantapur and show that in one of the three years, returns are very high, while in drought years they are similar to the figures obtained by Anagol, Etang and Karlan (2013).”

The problem with Anagol et al.’s research does not seem to lie in its lack of ‘social context’, as Acemoglu and Robinson argued, but simply in a limited sample.

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