This option controls how entities/characters get processed by TinyMCE. The value can be set as shown in Encoding Types below. You can also mix named and numeric by setting this to "named+numeric" this way it will produce entity names of the ones found in the configured entities and numeric entities for other entities.
The base entities < > & ' and " will always be entity encoded into their named equivalents. Though ' and " will only be encoded within attribute values and < > will only be encoded within text nodes. This is correct according too the HTML and XML specs.
|named||Characters will be converted into named entities based on the entities option. For example, a non-breaking space could be encoded as .|
|numeric||Characters will be converted into numeric entities. For example, a non-breaking space would be encoded as  .|
|raw||All characters will be stored in non-entity form except these XML default entities: & < > "|
entity_encoding : "raw"