- AD&D 2nd Edition Player's Handbook
When it comes to misunderstandings about alignment, I think Chaotic Evil stands out as the point at which most of them intersect. There was never a better excuse (except perhaps for an uber-moralistic paladin) for a player to act like a complete ass than by creating a Chaotic Evil character, and nor was there a better excuse for a DM to behave like an unreasonable dictator in banning such characters outright. But Chaotic Evil is just as interesting an aligment as any other if it's played thoughtfully, and I think a lot of the problems associated with it arise from the fact that most of us started playing AD&D when we were about 11 years old. 11 year olds don't do subtelty: if you're Chaotic Evil, it means you're a vicious and uncontrollable psychopath. But it also stems from quotes like the one above, which don't do a subtle reading of alignment any favours whatsoever.
First things first, a Chaotic Evil character is as intelligent and self-aware as any other. Bad people don't generally put their lives in unnecessary danger by flagrantly breaking the law when there is a chance of being caught, pissing off their friends, and starting fights with whoever they meet. A small minority of socially inept psychopaths may do those things, but for the vast majority of Chaotic Evil people, law-breaking is done only when discovery is unlikely, friends are viewed as a valuable resource, and sadism or brutality is meted out to the weak when victory is assured and there is little chance of retribution. Stupid Chaotic Evil characters will make errors of judgement, but there is no reason to assume the intelligent will do so.
Secondly, Chaotic Evil characters are still people. They become lonely, stressed, annoyed, and upset just as those of other alignments do, although they may react in very different ways. The 2e DMG actually says as much when it gives the example of a bored Chaotic Evil mage at the local inn, who's just after some drink and company for the evening. He's not about to turn anybody into a cockroach or pull somebody's finger nails out for his own amusement, and probably poses no threat at all in that setting.
But thirdly, and by the same token, Chaotic Evil characters have no regard for laws and morality except for that imposed on them by force, and they care about nobody other than themselves. The Chaotic Evil mage who enjoys carousing at the local inn may have a magically concealed dungeon in his tower where he can get up to whatever he wants to get up to, safe in the knowledge that he won't be discovered. Intruders might well find themselves hanging upside down from the ceiling and having their hearts carved out with a rusty spoon, or being gnawed to death by half-starved beavers. Chaotic Evil characters can be as sadistic and as brutal as they like when they know they can get away with it. The classic example of the Chaotic Evil character behaving in this fashion is the Stuntman from Deathproof, who kills because he has found a way to do so with impunity (or so he thinks).
What this means is that Chaotic Evil characters can be perfectly functioning members of an adventuring party so long as they can see a rational reason for cooperating with the other members, or can be forced into doing so by some kind of threat. And since most of the time adventuring parties do have rational reasons for cooperation - maximisation of profit - the issue of Chaotic Evil characters screwing everything up should rarely arise. Potential for conflict is more likely to come from issues such as what to do with prisoners and whether to help those in distress.
The scenario portrayed in the quote from the 2e Player's Handbook at the top of this entry is therefore unlikely to ever occur - because what Chaotic Evil character would be stupid enough to make enemies of his comrades in such an obvious way? The answer is that none would, except one grotesquely stupid or else obscenely powerful; somebody like Blackbeard the Pirate may have been able to browbeat his minions into obedience in such a way, but even he relied more on the carrot of treasure and women than he did on the stick. Because how long would he have lasted if all he did was try to keep all the treasure to himself?
The idea that Chaotic Evil characters are likely to make a game unplayable or un-fun doesn't stand up, for me. I think this misperception has arisen because of quotes like the one in the 2nd edition Player's Handbook, and because D&D players are mostly geeks - some of whom are not equipped with the social skills necessary to a) play sensibly or b) deal with people who can't play sensibly.