The period right after retirement, when people have just stopped working, can be the most critical period for investors, say experts, and yet it's also a time when people make decisions with their guts that they ought to be making with their heads.

People are often unwilling to take risks during this period-say, by keeping investments in the stock market. Yet at the same time they're ignoring the risk of longevity, or what might happen with their money if they live another 30 years and have to deal with the inflated costs of food, shelter and (even more sobering) health care. Imagine trying to spend 1986 dollars on health care today.

So it goes that behavioral finance has become the topic du jour, and insurance company Allianz has gone out and plumbed the thinking of 10 experts in the area, creating a report called Behavioral Finance and the Post-Retirement Crisis. The report discusses why investors make certain decisions about products like annuities, then digs into why that behavior might not always be in their best interests. It also considers how such behavior might be changed.

One observation of the report is that retiree aversion risk is often greatly amplified. Professor Eric Johnson of Columbia University recently worked with the AARP and the American Council of Life Insurers to look at risk-taking behavior. Where normally a gambler in Atlantic City would risk a $3 loss to make a $6 gain, retirees are in the woodshed by that time.

"Nearly half of the retirees said that they would refuse a gamble with a 50% chance of winning $100 and a 50% chance of losing as little as $10, which suggests they weighted losses about 10 times more heavily than gains," says the report.

And that kind of aversion can have a dramatic effect on what they do with money after they retire-say, when they are faced with the choice of taking a lump sum distribution of money or annuitizing. Johnson says that handing over the money to an insurance company can seem like "losing" the money, and because the psychological effect is double, handing over $250,000 can seem like handing over half a million, he says.

Investors might also not realize that they're thinking in terms of nominal dollars not real dollars. Professor Jeffrey Brown of the University of Illinois found that an investment spurned by retirees when framed one way might be embraced when it is framed another way. He took a $100,000 savings account with 4% interest and put that in front of 1,300 people older than 50, asking them if they preferred that to a life annuity paying $650 a month. The two choices were actually designed to have the same actuarial value. But only 21% liked it when it was positioned as an investment, whereas 70% preferred it when it was positioned as a monthly income stream, not an investment. The investment moniker had more risk associated with it.

Such behavior has come under greater scrutiny as investors continue to reel from the financial crisis. People tend to take a rear-view mirror view to the choices they make, says the report.

"I find a very strong negative relationship between a bad stock market return and annuitization," said Alessandro Previtero, a fellow at the Anderson School of Management at UCLA, at the press meeting. "After a negative trend in the stock market, individuals are more likely to take an annuity. After a positive time, they are more likely to take the lump sum."

"People make long-term binding financial decisions based on the last six months of the stock market," echoed Shlomo Benartzi, a professor and co-chair of the behavioral decision-making group at UCLA. Benartzi said that the behavioral finance element of an advisor's work will become more important as investors become more responsible for their own decision-making in the defined contribution era.