The sorting in your screenshot is correct for when that option is turned on. All but the first folder will be treated as if they start with "0" followed by the non-numeric characters in the name. The last folder will be treated as if it starts with "2".
This is usually a good thing, as it means that you get this kind of order:
Folder 1
Folder 2
Folder 10
instead of strict character code order, which is usually worse:
Folder 1
Folder 10
Folder 2
But if you want the character code order, just turn off the option.