Punish characters – they’ll love you for it. And it’s good for introducing a bit of strategy to your world.
When something goes wrong for a character – usually failing a challenge, but also choosing something that has a significant downside – you should mark that. You could take away some of their progress or resource qualities. Or you could introduce new qualities that are a problem and need to be managed (like Nightmares or Wounds in Fallen London). This is good, because it gives a sense of risk and reward. And it allows options like spending resources to reduce these menacing qualities.
It also means you get to be quite mean to characters if these problems get out of hand. That’s often fun to write, and it provides scars and war stories for characters. They won’t remember when you took a few actions of progress away from them, but they’ll remember being thrown into the weasel pits.