First, a clarification: I don't mean simply to sit down and observe people NOW, while trying to create characters, but as a lifelong effort, to understand how people tick. The more you understand this, the better you will be at presenting convincing, three-dimensional characters.
And no matter how many idiosyncracies or twitches you give a character, if you don't have the above down, all you'll have is a patchwork of twitches and jerks ... there'll be no character there at all.
There's a line from Gerald Kersh that may help. It's been quite a while, and I don't have a copy of the book here with me, so I hope I'm quoting it properly: "There are those one hates until one sees, through a chink in their armor, a thing nailed down and in torment." The important thing is to be able to feel your character emotively. If you can't do that, you're not connecting with the character, nor will you be able to project that character in such a way that the reader will connect with them, even peripherally. This applies to characters you don't like, as well as those you really have a fondness for. I recall, a few years ago, working on a story idea where the narrator was a professional hit-man. I had to live inside that character's head (it was told first-person), and I didn't like it one bit. Mind you, he saw himself as conscientious about his job; he was generally softly spoken and treated people decently and with even more-than-common respect; he was indifferent-to-kind to animals; he never got passionate about his work, it was just his job. At that point he became calloused, emotionally removed from what he was doing. Whoever he was aimed at ceased to be human for him, and simply became an object to be dealt with to get the maximum result, whether that was by threatening, breaking a limb, or killing them. One scene involved someone he'd come into contact with peripherally, but whose family he had had to kill as part of a job. When the man showed up with a gun unexpectedly, the narrator was involved in a card game; the game was interrupted, and this ticked him off. He didn't feel threatened -- he felt annoyed; but he also recognized that he couldn't have this sort of thing happening, so he made sure the fellow, while surviving (unnecessary killing produces unnecessary entanglements, in his view), wouldn't be bothering him again. I didn't go into any detail, but it wasn't necessary. The point being that, to sum up his take on this incident, I ended up using a near-throwaway line at the end of the scene. As he goes back to his game, the guy is already becoming part of the past for him, and his thought is simply: "And daddy makes three." That's it. He has no more emotion, once the problem is removed, than that; but it tells you quite a bit about his character (and you can see why living in his head was no fun).
So... ultimately, you have to find the parts of yourself (and we all have myriad selves to draw on) which corresponds to whatever character you're dealing with, and get in touch with that part of yourself enough to be able to know what that person would think or feel from the inside. As long as you only see a character from the outside, so long will that character remain as flat as any shadow on the wall....
