Consider this problem faced by Robby Stein,

When I add a new friend to Gmail chat, sometimes my friend’s email address is added as their contact name, such as hikingfan@gmail.com. I personally like to have the name of all my chat friends in my chat list so I don’t get too confused as to who’s who. To change this, I used to go into contacts, select the contact profile, add the name of my friend, and then save it. (from official Gmail blog)

On a slightly different note, I was having similar problem. I have large number of gmail contacts from orkut. On orkut, people used profile name fields for status updates in past, before orkut launched status update feature. So I have their weird contact names in my gmail contact book.

As an example, as shown in following screenshot, the real name of my friend is tanvi while by default its set to “tan ban— New Yr IN GOA!!!!!!!!!!“

Now with this new feature, you can just click on names to edit them! Yes, its as easy as it sound. (via official Gmail blog)