As Adam Smith famously wrote in The Wealth of Nations (1776), "It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner but from their regard to their own interest." And the economists who followed in his footsteps developed the idea that human beings are self-interested and essentially rational, seeking to gain pleasure (or wealth) and avoid pain (or loss) for as little work (or cost) as possible.

If only that were true. When it comes to money, we often act irrationally, even against our own interests, and an entire science called behavioral economics has sprung up to explain why. To take just one example, it makes little sense to keep funds in a low-interest savings account while also maintaining balances on high-interest credit cards. Yet many of us do just that, behavioral research has found, because we tend to keep separate mental accounts of our assets and liabilities instead of regarding all of our money as fungible.

Behavioral economics' key contribution to understanding how we think about money is the notion that we rely on a host of mental shortcuts economists call them judgmental heuristics to make financial decisions. Many of these rules of thumb are instinctive, buried in our brains long ago by tradition, or even longer ago by evolution. Either way, these cues not rational deduction often govern our reaction to financial challenges. One of the most powerful is our aversion to loss; by some researchers' estimates, losing a given amount of money triggers twice as much pain as the pleasure generated by gaining it. Over the long haul, individual investors will hang on to losing stocks and even sell winning investments and pay capital-gains taxes in order to avoid realizing losses. And in rapidly declining markets, we tend to chase safety and move our assets into cash to avoid further short-term losses, even if we're investing for a retirement that is decades away.

Humans are also prone to "recency bias," the tendency to pay too much attention to events that have just happened. Investors put excessive emphasis on recent past performance, moving money into stocks and funds that have done well recently. But that's just another way of buying high and selling low. The average 401(k) participant moved money into company stock in September 2008, probably to chase recent gains, according to research by Shlomo Benartzi, a behavioral-finance professor at UCLA. But many of the very stocks that had been doing so well melted down within a matter of weeks.

All of which means you need to overcome your gut instincts, especially in today's volatile investment climate, and establish a few heuristics of your own. Make contributions to your retirement accounts automatic, whether through payroll deductions or bank transfers. Stay invested in a mix of stocks and bonds. And diversify, which includes reallocating any matching stock you get from a company 401(k) plan as soon as you can.

Behavioral economists have also established that our mood affects our financial decisions, sometimes without our even being aware of it. And as we age, two broad emotional changes take place, according to recent research.

First, we grow more positive. Contrary to stereotypes, older Americans don't spend their days yelling at kids to get off their lawns; on the whole, they're satisfied with their lives. Second, our brains gradually relinquish focusing on the minutiae of specific tasks in favor of applying experiences and formulating life lessons.

That may not sound so awful, but it requires adjustments to your financial planning and earlier than you might expect. When it comes to tackling money-oriented tasks like applying for a mortgage or understanding credit card fees, Americans reach their peak performance at an average age of 53.3, according to a survey of recent research by David Adler, author of Snap Judgment, a book focused on the financial risks of instinctual decision making. After that age, the knowledge you have accumulated over your lifetime has to compensate for the likely decline in your cognitive skills and that's possible only if you're not overwhelmed by changing emotions. "We gain wisdom, which is great but not necessarily compatible with detailed planning," says Adler.

The lesson here is to focus relentlessly on the negative in your retirement planning. Assume you'll need to help your parents with medical bills and contribute to your grandkids' tuition. This is difficult not only because nobody likes to imagine worst-case scenarios but also because we're trained to think about retirement in terms of investing rather than consumption. In other words, the behavioral guys say, plan your spend-downs. If you can, match your retirement assets to your specific retirement liabilities: Which account will pay for your boat, and which will cover your wife's hip replacement? And if you can't, your portfolio or your expectations will need a reset. Left to its own devices, the aging brain floats into thinking things will take care of themselves. But they won't.

Finally, behavioral economics has shown that when presented with a financial question, we respond largely to how information and choices are presented to us in other words, to how the question is "framed." Take annuities, which should be a valuable part of retirement planning. They've grown somewhat more popular in recent years, but sales are nowhere near what many economists would predict. The problem? Annuities are framed as investments.

We tend to think of them as potential additions to our portfolio, comparable to stocks, bonds and real estate. And the companies that sell them have loaded mutual-fund features into variable annuities, marketing them on the basis of growth potential. On those terms, annuities can easily seem like a bad deal: Your principal disappears forever, and you can't change your payouts. But it's more accurate to see them as insurance against living too long. Your money never runs out and that's a benefit hard to obtain any other way. So think of annuities as longevity insurance. And consider using a plain-vanilla, immediate life annuity (indexed for inflation, if necessary) to cover costs you know will be with you forever, such as property taxes or long-term-care insurance premiums.

I'll leave it to you to decide whether this is good or bad news, but there's no longer any question about it: The most important ally you need to win over to improve your retirement planning is your own mind.