How do I set a custom avatar for my account profile in Mountain Lion?

Solution 1:

I haven't found a way to choose a photo from that popup dialog, but you can add one by dragging an image file onto the picture itself (that dialog may have to be closed for this to work).

Solution 2:

You can either drag and drop an image file into the avatar selector "well" (next to the Change Password button) or copy and paste image data (open your photo in Preview, Select All, Copy. You will have to click the avatar selector first so that it's focused (has the blue border around it) before you Paste.

Solution 3:

I did find the actual folder where they are stored

Click on your hard drive/library/User Pictures

I created another folder there for my custom pics and they show up just fine.