Believability (CSC)

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People, even strange and fantastic people, placed in unusual situations should behave in a realistic manner. Before the DM allows one of his NPCs to make a questionable decision he needs to think, if given the same situation, whether or not he would perform an action. While the character might reasonably make a different decision than he would, the DM needs to realize that any decision that the character makes will be reasonable, not irrational (unless the character is irrational by nature).
Particularly, the DM must realize that unless strongly motivated, beings will not throwaway their lives nor give away their life savings to intruders. Even in a fantasy world, the actions and reactions of intelligent creatures will not be too far removed from their counterparts in our own world. When characters begin acting in an unrealistic manner, the believability of their world begins to suffer.
In the "real" world, not everyone is entirely honest. Would all NPCs necessarily tell the truth at all times? It seems unlikely, but most beings do tell the truth, as long as it is in their interest to do so. A captive dragon may lead the PCs on a merry chase through the land, looking for a treasure that doesn't exist, instead of revealing that part of its treasure lies hidden in the next cave. Townspeople may send the PCs on a false quest in order to rid themselves of potential public nuisances.
Avoid overuse of popular stereotypes for NPCs. Stereotypes are often overused and unoriginal depictions of characters. Rather than develop fresh ideas, DMs often rely on the images they remember from their own early days as players. The DM needs to think about the types of characters he presents. Are they original? Are they unusual? Are all bartenders big and burly ex-adventurers? Is every evil wizard bent on conquest of the world? Are all merchants greedy and scheming? Is every princess rich and beautiful or every prince handsome and daring? If so, then the DM should rethink his cast of characters.
Stereotypes are easily forgotten. Make the characters memorable. Look for interesting alternatives to the stereotypes. Maybe that bartender is a grouchy little woman with a grudge against big burly ex-adventurers. The evil wizard could simply be selfishly self-centered, totally uninterested in the world outside. The rich merchant might be a bumbling idiot whose success depends on his aides and assistants.