One of the biggest challenges to a successful retirement is making sure you don’t run out of money once you begin tapping your nest egg.

Many economists and financial advisers have long recommended that retirees worried about outliving their assets consider life annuities, where the lump sum used to purchase the policy is converted into monthly income that lasts the person’s lifetime.

Americans, however, have shown little appetite for such products. According to the Limra Secure Retirement Institute, Americans bought approximately 39,800 immediate lifetime annuities in 2017, which equates to a little more than 100 annuities a day. Considering that roughly 10,000 baby boomers retire every day, this means that only about 1% of retiring Americans actually buy a lifetime annuity.

What accounts for this lack of demand? A new paper by Suzanne Shu and Robert Zeithammer at UCLA and John Payne at Duke University proposes a novel explanation—which could also help retirees think about their choices in a more rational way.

The researchers began by surveying more than 900 subjects between the ages of 40 and 65. They asked them a host of questions—from their marital status and income to whether they wanted to leave a bequest. They also measured the subjects’ tolerances for risk, loss and levels of financial literacy. Then, they looked to see whether these variables were correlated with willingness to consider annuities.

Surprisingly, none of these factors were predictive.

Except one.

According to the data, the individual difference that best predicts interest in annuities is a person’s sensitivity to issues of fairness. When the researchers asked the subjects questions about fairness relevant to annuities, such as, “It is fair that the insurance company is allowed to keep the excess funds” if a person dies, those who were most sensitive were also far less likely to consider annuities for their retirement.

Perception of unfairness

This research builds on prior work by Daniel Kahneman, Jack Knetsch and Richard Thaler showing that perceptions of fairness can partially explain some longstanding economic anomalies. In their work, the scientists developed a series of questions that can help assess a person’s sensitivity to considerations of fairness in various economic scenarios.

Here’s a sample question:

A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20.

Please rate this action as:

1. Completely fair

2. Acceptable

3. Unfair

4. Very unfair

While traditional economic theory assumes that higher demand should lead to higher prices, 82% of subjects thought it was unfair of the hardware store to take advantage of the short-term spike in demand. To them, it just felt wrong.

It seems likely that similar perceptions of unfairness are also influencing the demand for annuities. When the researchers offered subjects annuities whose terms were exceedingly generous—they paid out far more than the subjects paid in—those who were most sensitive to fairness still rejected the offers.

This suggests that their dislike of annuities wasn’t dependent on the details of the policy, but rather stemmed from an aversion to the shared-risk model. As a result, they conclude that it’s unfair if one dies earlier than expected and doesn’t get his or her money back. The reality is that such early deaths help subsidize those who live longer than expected.

Making better decisions

How can this research on fairness help retirees make better decisions when tapping their nest eggs?

First, don’t let emotional reactions like fairness scare you away. If you feel strongly about violations of fairness—say, if you always think it’s unfair for the store to raise prices after a storm—don’t dismiss annuities out of hand. It might be helpful to educate yourself on how annuities work, or learn about the expected total payout, which can make the benefits of the product clearer. Also remember that your money is being pooled with other retirees a lot like you, and together you’re hedging your risks of outliving your savings.

Second, think about all the possible outcomes when making the purchase decision. While the shared-risk model might seem unfair, annuities can provide an important protection against longevity risk. When retirees outlive their savings they often become dependent on their children, especially for paying their medical expenses. That is the opposite of a bequest. Keeping those other possible outcomes in mind, and the regret associated with them, can help counteract the concerns about fairness that come to mind when thinking about purchasing an annuity.

Third, make sure your choices are customized to your circumstances. Annuities aren’t the best choice for everyone. Even those who think annuities are fair should still think carefully before purchasing one. For example, if you have significant health problems, the typical annuity could be a bad deal, as you might not live long enough to get a return on your investment. On the other hand, annuities may be a great solution for people who expect to live a long time.

When it comes to tapping your nest egg, there is no one-size-fits-all solution. While the accumulation of retirement savings can be improved using nonpersonalized nudges such as auto enrollment in a company’s 401(k) and auto escalation of contributions, decumulation requires a highly personalized approach, in which the solutions are tailored to reflect the goals, circumstances and preferences of the individual.

If retirees better understood the forces that shape their decumulation choices, they likely would make better ones.

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