Abstract

According to the basic theory of behavioral economics and the corresponding empirical analysis, we found our current residents because of the loss aversion is strong, and thus in determining whether an alternative currency, the real exchange rate of the yuan less than the absolute level of response, but the real exchange rate fluctuations level sensitive. The RMB exchange rate system, the transition from a pegged to the dollar peg to a basket of currencies, in order to guard against the potential increased by the currency substitution caused by the impact of macroeconomic policies authorities should be: short-term value of the renminbi should not be significant or frequent adjustment, and must maintain the continuity of the current exchange rate policy; the long term to improve the domestic market environment, the residents continue to ease the loss aversion, nurture and enhance residents' ability to respond to exchange rate system reform. Based on behavioral economics, We find that in recent China, when people decide to hold certain foreign currency instead of RMB, they do not regard much to the absolute degree of the RMB exchange rate, yet often overreact to the fluctuation of the exchange rate due to the possible losing. It is reasonable then to keep a stable RMB value to avoid speeding up the currency substitution rate. To achieve this target, in the short term it is not fit to change the RMB exchange rate frequently or drastically, while in the long run, it is necessary to perfect the related institutions and a well balanced investment environment. Only in this way, it is hopeful to untangle people's fear of losing and improve their ability and rationality of decision-making