Act I: Theater directors and acting coaches say that you should react to what other characters are saying, rather than just acting.
I think it ought to be said that you should think about whether or not your character is listening carefully to the other characters, or not.
This impacts how you react. Characters who respond in an inappropriate way (in the script) probably are doing so because they aren’t listening.
People generally aren’t good at it. Off-stage most reactions come from not listening very well to others. If you’re good at listening deeply, you’ll be able to act as though you aren’t, but the inverse is not true. If you can’t listen deeply offstage you won’t know how to portray it. Call it method acting if you will, but you can’t fake true listening. The audience will smell you out. Your reaction won’t ring true.
Act II: if you’re writing dialogue and the people in your dialogue understand each other perfectly, all the time, then you’re not writing multiple voices or characters at all. Interesting dialogue reflects reality — where people sometimes aren’t listening. That’s why a life coaching session transcript would make an awful script for the stage. But it can be fascinating to watch a live demonstration of life coaching as it unfolds. It’s more like watching sports, because it’s unscripted and anything could happen — and probably will. And when the coach is a good coach, the coachee is going to perform like an all-star.