Kurtosis, what is it?
October 31, 2023 at 12:00 AM
by Sisler Companies

Kurtosis is a statistical measure that quantifies the shape of a probability distribution. It provides information about the tails and "peakedness" of a distribution compared to the normal distribution. Kurtosis is a useful tool in understanding and comparing datasets, as it helps to identify deviations from an ideal bell-shaped curve.

The term "kurtosis" comes from the Greek word "kurtos," which means "curved" or "arched." It was first introduced by Karl Pearson in the early 20th century as part of his research on the moments of a distribution.

Kurtosis specifically measures the fourth standardized moment of a distribution.

To understand kurtosis fully, it helps to first grasp the concepts of skewness and moments. Skewness measures the asymmetry of a distribution, indicating whether it is elongated to the left (negative skew) or to the right (positive skew). Moments, on the other hand, quantify the shape and location of a distribution by focusing on the relationship between the values and their central tendency (usually the mean).

Kurtosis builds upon these concepts by examining the tails of a distribution. There are three main types of kurtosis: platykurtic, mesokurtic, and leptokurtic.

1. Platykurtic (negative kurtosis): In a platykurtic distribution, the tails are lighter (less probability in the extreme values) than a normal distribution. This leads to a flatter peak and lower kurtosis score. In simple terms, a platykurtic distribution has fewer outliers or extreme values compared to a normal distribution.

2. Mesokurtic (zero kurtosis): A mesokurtic distribution has a similar shape to the normal distribution. It has moderate tails and a moderate peak, resulting in a kurtosis score of zero. Many real-life datasets follow a mesokurtic pattern.

3. Leptokurtic (positive kurtosis): Leptokurtic distributions have heavier tails and a more peaked center than normal distributions. This indicates a higher concentration of data around the mean and more pronounced outliers or extreme values. A leptokurtic distribution has a positive kurtosis score. Kurtosis serves several important purposes. First, it allows us to compare the shape of different distributions within the same dataset or across different datasets. By quantifying the degree of departure from a normal distribution, kurtosis provides a standardized measure for these comparisons.

Second, kurtosis helps us understand the risk associated with an investment or financial instrument. A high kurtosis score indicates a higher likelihood of extreme values or tail events, which can be critical in risk assessment and portfolio management.

Third, kurtosis plays a role in statistical inference. For example, in hypothesis testing, it helps determine the appropriate test statistic and assess whether a given sample is admissible within a certain distributional assumption.

It's important to note that while kurtosis provides valuable insights, it has its limitations. High kurtosis does not necessarily imply undesirable traits or inaccuracies in the dataset—rather, it indicates a deviation from normality. Additionally, the interpretation of kurtosis depends on the context and the specific characteristics of the dataset being analyzed.

In conclusion, kurtosis is a statistical measure that describes the shape of a distribution, focusing on the tails and "peakedness." It allows us to compare datasets, assess risk, and make inferences. Understanding kurtosis can enhance our ability to interpret data and inform decision-making processes across various fields such as finance, economics, biology, and social sciences.