"How do you differentiate good acting from bad acting?" This is a matter of personal taste. There are trends. There are many people who loved Philip Seymour Hoffman's acting. But if you don't, you're not wrong. At worst, you're eccentric. (An interesting question — and one you didn't ask so I won't answer it, here — is why are there trends? Even if Hoffman isn't objectively a great actor, why do so many people love him? For that matter, why do so many people love the Beatles, Shakespeare, and Leonardo Da Vinci? Maybe someone will ask a question about why there are general trends in taste ...)
I'm a director who has been working with actors for almost 30 years, and I'm the son of a film historian. I'll give you my definition of good acting. But I really want to stress (for the last time, then I'll quit) is that if I say Pacino is great and you disagree, my experience does not make me right and you wrong. It just means we have different tastes.
For me, an actor is good if ...
1. He makes me believe he's actually going through whatever his character is going through.
I'm talking somewhat about physical stuff ("He really is getting shot!" "He really is jumping off a moving train!") but mostly about psychological stuff. ("He really is scared!" "He really is in love!") If an actor seems to be "faking it," he's not doing his job (as I define it).
2. He surprises me.
This is the most nebulous requirement, but it's important. Except for really small parts that aren't supposed to call attention to themselves (e.g. a bank teller who just cashes the hero's checks), it's not enough for actors to just seem real. Seeming real is a requirement, but a second requirement is that I can't predict their every reaction before they have it. Think of how a woman might react if her boyfriend breaks up with her. There are many, manytruthful ways — ways which would seem like a human being reacting and not like a space alien behaving in some bizarre, unbelievable way. She might break down and cry; she might laugh hysterically; she might throw water in his face; she might go completely numb, having no expression at all ...An actor's job is to know the breadth of human possibility and the depths of their own possibilities. They must pull from this well and surprise us. Otherwise, they become boring and predictable. There are many ways and actor can surprise. Gary Oldman and Johnny Depp surprise us by being truthful while playing multiple, very different roles. Jack Nicholson surprises by being ... surprising. Even though he's not a chameleon like Oldman or Depp, you never know what he's going to do next. But whatever her does, it's grounded in psychological reality. It never seems fake. Christopher Walken, Glenn Close, Al Pacino, and many others have a surprising danger in them. They're a little scary to be around, because you feel they might jump you or blow up at you at any time. They are ticking time bombs. And, of course, many comedic actors (e.g. Julia Louis-Dreyfus) surprise us in all sorts of quirky, zany ways. Or watch Katherine Hepburn and Cary Grant in "Bringing Up Baby." Absolutely surprising and absolutely truthful! Another great example of surprising acting that never seems fake is Diane Keaton's work in "Annie Hall."
3. He is vulnerable.
Great actors share the parts of themselves that most people keep hidden. They are always naked. (Some are literally naked, but I'm talking about emotional nakedness.) Bad actors are guarded. They don't want to share the parts of themselves that are ugly, mean, petty, jealous, etc. There are so many examples of actors being naked on stage and screen. My favorite is Rosalind Russell in the movie "Picnic." Rent it some time if you haven't seen it. She plays a middle-aged schoolteacher who is in danger of growing old and dying alone. There's a heartbreaking scene in which she begs a man to marry her. She goes down on her knees in front of him. She gives up every scrap of dignity inside her and lets the scared, hurting parts of herself burst out. These are the same scared, hurt parts that are inside all of us — the parts we work hard to hide. Hiding them (by holding them in) takes a toll on us, and one of the greatest gifts actors can give is to sacrifice their dignity for us for us. They expose themselves so we don't have to. They are like Christ dying for our sins. This ties in with everything I wrote above: when actors are exposed and raw, it's always surprising. And if it doesn't seem real, there's no point in it. In fact, this sort of emotional nakedness is very hard to fake. If you ever get a sense that an actor is showing you a secret part of himself, he probably is. Examples (in my opinion) are Julianne Moore and Bryan Cranston. Also, rent "The Browning Version" sometime. The early one (not the remake). Watch Michael Redgrave. He turns himself inside out and wrings out all his pain.
4. He knows how to listen.
It's fascinating to watch actors when they're not speaking. Some are too caught up in ego or technicalities (e.g. trying to remember their next line) to totally focus on whoever it is they're acting with. Others seem to register everything they hear. You can see whatever is being said to them physically affecting them, as if the words are slapping them across the face. Watch Claire Danes. She's an amazing listener.
5. He has a well-honed "instrument."
By which I mean he knows how to use his voice and body to serve whatever role he's playing. This doesn't necessarily mean he's slim and has a six-pack. James Gandolfini used his body well. It means he knows how to move and talk in expressive ways. His voice and body aren't fighting him or holding tension that's inappropriate to his role. One negative example: Kristen Stewart. It's almost painful to watch her. She looks like she'd rather be anywhere else besides in front of a camera. She is (or seems) very self-conscious. To me, Hoffman was great because he embodied all of these traits. He was vocally and physically gifted. He wasn't in great shape, but he used the shape he had in expressive ways. If you watch him closely when he's not speaking, you'll see he always listened to his co-stars closely. What they say affected him deeply, and his reactions grew organically out of whatever they had previously said or done to him.
He was profoundly vulnerable. Always. This was his most distinctive trait. You always knew what you were getting from him was raw and honest. It was this rawness — as well as intelligence and a sly sense of humor — that made his work surprising and fresh. And I never once saw anything from him that seemed fake. I don't hate Tom Cruise the way some people do. To me, he's believable most of the time. He's just not very interesting. He rarely surprises me, and he doesn't seem to dig deep into anything raw or vulnerable inside him. He seems guarded. The must vulnerable I've seen him is in "Eyes Wide Shut," in which he did some good work. But it wasn't brilliant. And it's not his norm. Keep in mind that many people (who aren't themselves actors, directors, or obsessive film buffs) aren't very clear on what an actors contributes to a film. Which is fine. It's not necessary for most audience members to understand who does what during production. Lots of people think an actor is great if they like his character. But that's often a function of good writing more that good acting. Or they think he's good if he pulls off some impressive effect, such as gaining or losing a lot of weight or pretending to be handicapped. Those are impressive stunts, but they aren't the core of what actors do. If you forced me to rank Dustin Hoffman in "Rain Man" vs. Dustin Hoffman in "Kramer vs. Kramer," I'd say he did more exciting work in the latter. In "Rain Man" he was able to hide behind some stunts. In "Kramer vs. Kramer," he just had to be truthful.
Some people think acting is good if they like the movie. Keanu Reeves, in my mind, is a horrible actor — mostly because he's wooden and fake. It often seems as if he's reading from cue cards rather than saying words that are his. But some people like him because they think the Matrix films are cool. They confuse the movies with the actor. If some other actor had been in those films, those same people would have liked him. It's not really the actor (or not entirely the actor) they're liking. But since he plays the protagonist, they focus on him.
Finally, many people confuse an actor's life with his work. Tom Cruise is a good example. He's a high-profile Scientologist, and many people dislike that religion. They dislike his acting at least in part because they find him unsavory as a person. To some extent, this may be a sign of bad acting on his part. At least, he's not a good-enough actor to make people forget about his private life while they're watching him in movies. To some extent, it wouldn't matter how skilled he was.
Currently, many people are having strong reactions to work by Woody Allen and Mia Farrow that have nothing to do with what they're doing on screen. I'm not even remotely saying such people are wrong, stupid, or crazy. I'm just saying that people's reactions to actors are often complicated and not 100% influenced by their performances.
UPDATE: A couple of people have asked me to elaborate on my claims about Keanu Reeves. They feel that although he's often wooden, this is appropriate for his character in "The Matrix." I will admit up front that I only saw the film once, when it first came out, so it's possible I'm misremembering. Certainly, a good director can sometimes put bad actors to good use.
Let me confine my remarks about Keanu to his acting in general, not just in "The Matrix," though I am still skeptical about his work in that movie.
There is a difference between playing an undemonstrative person and being a wooden actor. In fact, playing someone who is reserved is very difficult (because you have to act without showing very much), and the actors who pull it off are brilliant.
I would point you to Anthony Hopkins in "Remains of the Day," Tommy Lee Jones in many of his roles, and even Clint Eastwood in "Dirty Harry." These actors manage to convey the sense that though they have stony exteriors, there's much going on underneath. To me, Keanu Reaves conveys an actor who is showing up and saying his lines. I don't believe much else is going on underneath except maybe nervousness. If you feel otherwise, that's fine. Remember, it's subjective.
Having auditioned many actors, I'm used to hearing ones that can take any writer's lines and make it sound like their own words. And I'm also used to less experienced (or less gifted) ones who sound uncomfortable with words that aren't their own. They sounds as if they're arereciting or reading something. They sounds scripted.
Listen to Keanu in the clip, below, especially at around 10-seconds in, when he says, "I have offended you with my ignorance, Count." Many of his line-readings sound like that to me. He has not fully lifted them off the page and into his own mind and body.
I don't know if you can see a difference between Keanu, above, and Tommy Lee Jones, below. They are both pretty deadpan. The difference, for me, is that Jones seems to be speaking his own words, even though they are just as scripted as the ones Reeves speaks. Jones is just much more comfortable in his skin and much more able to "own" his lines.