Why is the wheel diameter setting on Kepler 27.5 and why?

The display unit reads the data in current from the controller and then converts it into MPH to show on the screen.

When you set it to 26, it'll read it as it's 26 inches however since your tires are 4" thick it'll read it lower than the actual speed.

27.5"usually gives a better reading on fully inflated tires.