I think if it this way (very simplified): there are candidates that like challenges and who don't mind imperfect interviewing situations, and i had my fair share of people who dislike it would fare better if we just let them work on a real world problem. We did both for each candidate for some time, but the latter was much more costly and didn't provide such a good signal in the end.

Open-mindedness goes a long way. Also typically our interview questions are set up in a way where it's expected you won't finish but try, which reveals a lot about personality and how problems are attacked.