37: Don’t turn a small issue into a big one, and never a big one into a huge one.

In any company, and in our personal life, we need to deal regularly with issues. It is part of being human. They start small, the ones you can manage. Your boss or mum don’t even need to know. Regular stuff to fix.

Some issues start small but grow over time, taking up more of your attention until they need to be reported to your boss. Occasionally, these larger issues can escalate into major problems. When you look back, you’ll realize that all major issues started small at some point.

I vividly recall a credit case from many years ago involving a reputable, long-term customer. The problem began with an unpaid amount of $10k, which then escalated to $100k and eventually reached $600k within six months before the customer declared bankruptcy, forcing us to write off the debt.

In hindsight, it’s easy to ask why we didn’t stop supplying the customer when they failed to pay the first invoice. There were many reasons, but fundamentally, we assumed that this long-term AAA-rated customer would eventually pay and that this was just a temporary cash flow issue. In situations like these, information is often asymmetric, and people can stretch the truth to protect the companies they’ve built. For account managers, halting trade with a profitable account they’ve developed over time is hard to justify [1]. By the time the debt reached $100k, the issue was already significant. At that point, halting supply could have meant the customer would go bankrupt, with no chance of repaying the accumulated debt, so we continued to supply.

I’m not suggesting that all situations are identical; companies will inevitably face cash flow issues, both big and small, and often they find a way out. Judgement is key. But when a problem is still manageable, keep it that way. If it escalates, contain it at that level.

The lesson is: if you let an issue grow, don’t be tempted to take more risks to shrink it. There’s a strong chance it will only become a larger problem.

This lesson from credit management applies to many other challenges we encounter daily. If you’re already dealing with a significant issue, don’t take risks that could turn it into a huge one [2]. Address the problem immediately. It’s always better to accept small losses than face big ones.

[1]? Behavioural finance research has identified many cases where biases, such as overconfidence and optimism, can cloud judgment in managing credit risks. These biases lead managers to underestimate the likelihood of a credit default, especially with long-term, seemingly reliable customers and this is why it’s often better to involve a third party (credit manager!) without emotional ties or connections to the account.

[2] Barry Staw's in 1976 published a paper titled “Knee-Deep in the Big Muddy: A Study of Escalating Commitment to a Chosen Course of Action”. There he explored the phenomenon of "escalation of commitment," which is closely related to the sunk cost fallacy and how decision-makers persist in losing ventures due to past investments of time, money, or effort. That is alike to continuing to supply a non-paying customer because of the material effort in the past to win it and retain it. This concept explains why people and organisations continue to invest in failing projects or decisions, believing that additional investment will somehow turn things around, even when evidence suggests that cutting losses would be a better choice.