I imagine it selects for people who want the job at a FAANG company so badly that they spend a lot of time reading algo textbooks and grinding Leetcode. I guess this is also a proxy for other character traits, like grit, pattern recognition, learning from mistakes, and so on.

Nope. The main determinants of effectiveness are 2 things:

1) general intelligence

2) conscientiousness (how much effort you put into what you do)

Don't you think asking applied textbook problems is an excellent way to test for both at the same time ?

If you are smart, then what is the problem with going through an algorithm textbook, listening to Youtube explanations when you can't follow and just spending your evenings for 3 weeks or so. Frankly, if you get to chapter 5 out of 20, you've probably seen what you will be asked, so you could easily stop after one week and still easily pass the interview bar.

And if that's too much effort, why should they assume you'll put in effort once you get hired ? They'll be expecting more than one week's worth of effort from you.

Furthermore, Google actually tracks how well it's questions work, how the resulting hires perform. If there really was no correlation there, they'd have changed it (also they've documented it in Laszlo's book, well at this point books)

I bet it would measure even better if they told you a week beforehand that the question would involve some obscure, not super easy but not super difficult algorithm, but one that they can reasonably assume you've never seen before and then asked you to apply it on the interview.

conscientiousness is more complex than that. You have to understand what positive benefits manifest in what scenario for every given level of conscientiousness.

I'm very low-c and that means I have a proclivity to procrastinate and a tendency to not be able to stick with things very long term of my own volition. This doesn't make things impossible to do for me as I even managed to become fluent in Japanese which was a tortuous multi-year effort. Suffice to say higher conscientious would be nice, but it means I have a tendency to also not feel the need to follow all the rules all of the time and this results in my sometimes taking a contrarian or unorthodox approach and sometimes this has a massive and positive benefit. It also means I'm constantly forgetting to log my time sheets and take out the rubbish and things like that piss off my boss and my wife and this is generally considered a problem but my boss and my wife also love me because I do things they don't see other people doing and im considered unconventional but in a very good way.

Everything is a trade-off. It's not like all high conscientiousness people is the right mix of people to have.

I mean, Computer Science is practiced at Google. Shooting from the hip and excusing it as craftsmanship is generally frowned upon.

They're looking for a repeatable, fair baseline cut for basic competency and motivation, and "has this person ever read a compsci textbook" is a fair proxy for that.