The explanation on the Preferences panel is wrong and confusing. The Retina display doesn't actually run at 1280x800. Instead it just "looks like" it does.
A 13.3 inch screen running at 96dpi (pixels(dots) per inch) has a resolution of about 1280x800 and the 8pt font and other on screen elements are big enough for the eye to see. When you run a 13.3 at retina resolutions 2560x1800 the fonts are much much smaller and hard to look at, so OS X makes them as big as they were at 1280x800 but more detailed. You get to see the same thing as one would at 1280x800 but at much greater detail 226dpi instead of 96dpi.
Resolution is just a big "carpet" of dots, you have a fixed amount of them and you can make the dots bigger to cover more area. For example a 3840x2160 4K TV that is 48 inches wide diagonally has about 90 pixels per inch comparable to a normal desktop monitor. A 15 inch Retina Macbook Pro has 2800x1800 (a little less than the 4k tv) but they are packed smaller and closer together on a much smaller surface area, 15 inch wide instead of 48.