I have read a lot about developing characters for stories and I consider most of what I have read junk: Junk du jour. (I’m practicing my Franglish).
Observation is about the best idea I have read and absolutely everyone suggests it. (Tout le world). Observation is great if you want to have your mailman on page 67 twirl her waxed moustache, but observation alone will never give you the kind of depth or richness of character necessary for the main persons you are writing about; and make no mistake, every story is ultimately about a person or persons.
Instead of observing the world to develop your characters, my suggestion is to first observe yourself. Know Thyself, the Philosopher said. (I don’t think it was a French philosopher).
I am no great fan of Meyers-Briggs or any of those personality-type surveys any more than I am a fan of astrological charts or palm reading; but then I am no fan of contemplating navels either. Still, there are tools out there that can help a writer answer some basic character questions which ought to be asked first about themselves. Am I introverted, extroverted, sensing, feeling, thoughtful, and what do these words really mean? Why do I behave this way under these conditions or why do I act like that in those circumstances or what am I thinking when I respond to that question (what was I thinking!)? Do you see?
There are plenty of writers in this world, but few people who know themselves enough to say, like Madeline L’Engle “My characters are all smarter than I am.” How did she know? How did she imagine that? Very simply, the better we know ourselves, the better we will be able to construct characters unlike ourselves. What kind of person would I be if I was more extroverted, if this happened in my childhood instead of that, if I married that other person? The better foundation you have, the better you will be able to construct variations on the theme.
Objections? No, you are not boring, and yes, you need to look in that dark corner where you don’t want to look. You just might find it a life changing experience.
Ultimately, you will know your character like you know yourself. When the monster slithers out of the dark, you might scream, but your character might have the fortitude to spit in the monster’s eye, or maybe the presence of mind to look for a way of escape, or they might shrivel up and be eaten. I don’t know; but you should know your character that well to know without hesitation how they will respond; and you will see that most clearly by having some idea of how you would likely respond in the same circumstances.
Now, your characters may be younger, stronger, prettier, more outgoing, and they might even be smarter than you, but if you are living an unexamined (relatively shallow) life it is hard to imagine how the person you are writing about will have any depth in their character.
Writing Tip 8:
The first key in developing deep characters is to know thyself and then moo-ve vous (take it) from there.