I draw a lot of my characters actions and reactions from real life, drawing on my own experiences and those of my children, wife, and friends.
For years I've watched people (not peeping, just watching, in public, it's not creepy damn you!). I like to see how they react to certain things. It probably explains my off-kilter sense of humour, I get just as much enjoyment out of a person groaning or looking oddly bewildered as I do from a deep belly-laugh.
I think the creative process for characters and their reactions has to go beyond that though, well into the realm of imagination. I can't have one of my friends or family commit crimes, or kill someone to get a better understanding of my villains (or protagonist, could be the protagonist). I can't do it myself either, though there are times where I'm sure prison would provide enough of a quiet writing environment that I might actually finish this book.
So I dig into the realm of my imagination, and use my observations of myself and other people as a baseline to measure against. It'll tell me whether a character feels "real" or not.
As for the creation of the characters themselves?
I create a template for a character in mind-map format. I describe their physical appearance (male/female, young/old, athletic/...not so athletic, hair/eye colour etc.) and I throw in a paragraph about their personality.
This character is emotionally stolid and by the books with a black and white view of right and wrong. They wouldn't tell a lie to get their own tail out of the fire... and so on, though usually not so blah as that.
It helps to give them a flaw or two as well. It doesn't have to be something like "colourblind" or "sucks at math" or "has a raging temper". In the above example the "black and white view of right and wrong" can be a flaw (quite easily) when played right.
After I'm done that character introduction and getting a feel for if they work, I like to have a sense of where they're going through the story, what's their intended path of growth. Does the character learn to be more or less flexible? Do they learn to tolerate faults in others? Do the learn to tolerate faults in themselves? and so on.
I've found one of the best ways to get to know a character is to whip them up, then throw them into a situation to see how they deal with it. If it's a life or death situation and I find myself cheating so that they live I have one of three options:
1) Let them die (sometimes not preferable).
2) Don't put them in that situation (sometimes not possible).
3) Fix the character so they have a some way of getting out of it that isn't cheating (or just let them die).
Once I'm done with my experimentation, I sometimes have a character that needs a story. Often through the writing of that story (such as BookB right now) I find the character I start with is a lot more realized and "whole" feeling by the time I finish the first draft. Which means they may not fit the original character creation or arc, and the character I have coming out at the end of the book couldn't possibly have been the same character that I started writing the book with.
The solution to that problem? Revision.
Go back, re-write and revise until I have a full, cohesive character arc, that fits the story, is believable (at least on the emotional level), and that evokes genuine emotion from the reader.
I've yet to achieve a character of that level, as I'm still revising my first full length book (and it's getting longer by the day). Hopefully when I'm done some of you will be able to hold me to this and let me know if I pulled it off.