Most of you know I consider myself a chemical engineer first. Oh, I’ve got lots of other hats- but I approach almost every problem using my chemical engineering training. Which is why I use Bayesian statistics to make decisions. Don’t panic- it is scientific, but, at least its veneer is simple to comprehend- it is basically normal logic. It works for scientific analysis, project management, even for vacation planning.
Basically, one assigns (or knows) confidence levels to the various choices or conditions. Starting with the concept that a perfectly true statement (I am a human being) has 100% confidence level and a completely false statement or lie (I have been to the moon) has a 0 % confidence level. The problem comes about when one must assign confidence levels (or degrees of plausibility) to those items where the choices are not perfectly clear.
So, if I know that if you don’t file your income taxes, the odds are pretty good you’ll be caught. Say that probability is 99%. But, if you don’t file your income taxes and you are an independent contractor, the probability of being caught is a function of whether you got a 1099 mailed to you. No 1099- the probability is 60 to 90% (pretty wide range). If someone issued you a 1099, then the probability of being caught approaches 100%. (We’ll leave it at 99%, for now.)
But, there’s another issue afoot. If you only have W-2 wage income, and your stated deductions are for 0 person (on your W-9), the IRS knows the odds of you owing them money is pretty low. As a matter of fact, the odds are that you are due a refund. So, the probability that the IRS will contact you drops way down- say to 25%.
The independent contractor is generally going to owe money. The higher the gross income, the higher amount owed. Because it’s not just income taxes that the IRS will collect, but Social Security and Medicare taxes (currently around 14.5%) on your net income. Well, that number is exciting to the IRS, and you will serve as an example to others, with their point of view. So, that’s why the odds I originally assigned to this case were 99% and above.
As you can see, these are all constructs in the mind. I don’t have the IRS computer codes at my disposal which will really set the probabilities. And, if my original facts are wrong (I thought you requested 0 deductions on your paycheck, but either you or your employer made the mistake of saying you have 5 exemptions for withholding), then all my other modeling is incorrect.
And, therein lies the reason why we must always check and recheck the basic assumptions. Because all it takes is one wrong assumption (or fact) to bring down the whole deck of cards. It’s why most criminals get caught- they assume they are the smartest one in the bunch and base all their actions on that wrong assumption.
Great insight! I love the last sentence “Criminals…assume they’re the smartest one in the bunch and base all their actions on the wrong assumptions.” That’s awesome!
Tor Constantino recently posted..Our Pregnancy Update – Week 34
It’s always amazing to me how we all think we are the smartest ones in the room… which is usually only true when we’ve locked ourselves in and can’t find a way out…
Sounds logical to me!
Carolina HeartStrings recently posted..BRIE AND STRAWBERRY PANINI
🙂
i have to admit i am confused by the IRS and tax and stuff … but i am with you on the statement 100% human and never been to the moon
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Helen:
The trick to every decision is to determine the likelihood of potential outcomes and maximize the potentials for those you desire..
Roy
Roy,
Thanks for your words above.
As a self-employed consultant, I do pay it all. And, I’m always worried, always checking, and glad I have a spouse with employed income that usually “balances” out the score.
I claim no complete knowledge of the IRS. Does anyone? haha 😀
~Keri
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Oh, Keri…
There are good ways to control your costs. This is not the venue…
But, then again, perhaps a viable analysis of the choices to be made would be the obvious corollary to the post 🙂
Roy
One bad assumption and it’s all over but the shout. I trust my gut, it hasn’t been wrong yet. I generally know a good thing when I see it and when something is amiss, I’m the first one to get out of the situation. Good point, Roy. We have to be able to see things as they are and not assume.
Jennifer Olney recently posted..Pardon Me, Do You Validate?
It goes back to the other adage- trust but verify- Jen. We need to continually challenge our assumptions to insure that they are still valid- and be willing to drop any model that fails to pass the tests.
As someone who used to write analysis reports for health claims audits, I wish I had this example for explaining confidence levels. 🙂
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Sorry, Cathy, my time machine seems to have run out of fuel…
Roy
My father used to say “Never assume anything, it makes an ass out of u and me.” But then he also dealt with food science so much like you he never assumed anything. Great post!
That’s among my favorite quotes, as well, Lisa…
a gut feeling is your first initial sense, your gut… your immediate reaction. it does NOT involve any thinking! if you are then analysing and having to think you are no longer using your gut instinct.
Actually, your “gut feeling” is based upon your knowledge- and your prejudices- so there has been prior thought…
The trick is to separate out your bias and prejudice to arrive at the best solution or choice.
Roy
thanks for the insights
i can relate to you, i studied engineering as well 🙂
Thank you so much for visiting and adding your comments, Farouk!
Glad this story resonated with you.
Roy