Functional fixedness is a term used in psychology to describe a certain deficiency in human problem solving regarding perceptual limits. The problem is difficult to describe, but the essence is that as humans, we will not see a potential solution to a problem if that solution regards an unfamiliar use of an object or resource. This problem extends both from the way we are taught to solve problems as well as how we are taught to use our resources.
Dilbert and his pointy haired boss and coworkers provide a good example of functional fixedness in a particular comic strip about teamwork. In a team-building excercise, the group is asked to construct a sundial from a donut and a pencil. The solution, of course, is to stick the pencil in the donut. The 'functional fixedness' at work is the team's inability to percieve the pencil as being anything but a writing tool, and the donut as being something other than a food item. Of note is that this problem would have been more difficult had they simply been asked to construct a clock, because the team would have had to recognize the functionality of a sundial as a clock; this is a less obvious example of ff.
Anytime you hear of an object or idea being used in an unusual or suprising way, it is likely an example of a person overcoming functional fixedness. "How to build a computer out of black holes" is a wonderfully unuseful example; black holes are supposed to suck you in and crush you into a single point of infinite gravity; using them as a calculator does not immediately come to mind! Another example is running NetBSD or Linux (or whatever) on an unusual platform, such as a Dreamcast or XBox, or using a computer for an unusual purpose such as controlling Christmas tree lights or controlling a coffee machine. These represent overcoming the functional fixedness of a game console in the first example and of computers in general in the second. Note that all the given examples seem like very 'hackerish' things to do; this is not by accident, since a commonly recognized part of being a hacker is solving problems in unusual ways. See hacker.
The reasons for functional fixedness are complicated, having to do (mostly, in my opinion) with how people are taught how to solve problems. (I concentrate on children here because most such learning happens during childhood, but the learning process is life-long.) The education (in a very broad sense) of children regarding the objects in the world around them is very narrow minded; a bed is where you sleep, food is what you eat, a pencil is what you write with; it seems to me that the mistake is not in teaching children what specific objects can be used for, but in too deeply connecting certain uses with certain objects. I believe that if children are taught both multiple ways to solve a given problem (You can sleep on a bed or you can sleep on the couch, but the bed is softer) and multiple uses for common objects (a credit card can be used to pay your bills and is a handy straight edge!), they would learn to properly associate goals with certain functions instead of objects (we need to know the time; we don't necessarily need a watch or a wall clock to solve this problem), as well as objects with multiple functions (a monitor can be used to keep pastries conveniently warm), they would learn better to make their resources and their problems meet in the midle, instead of relying on the 'correct' or 'normal' way to solve a problem.
Warning: philosophical/religious pontification follows: I believe there is also a degree to which this applies to religion, and modern belief systems; in specific, if children are taught from a young age that truth comes from a book or a pastor or priest, they will not have a good concept of religion as a system of logic. Children who are taught how to reason and think for themselves, as well as discretion concerning who and what they believe and why they believe it will find it easier to think outside traditional religious boundaries. I feel that this is an important application of the concept in modern times, though not an integral part of the subject.
Me write pretty, use big words! /msg me if you have a favorite example of functional fixedness or if you disagree with my writeup in some way. Information is taken from Psychology 120 at Purdue; Dilbert the comic strip, the Dilbert character and the phb are property of Scott Adams.