While noisy, this process generally means that really outrageous methodological errors or theoretical claims get weeded out. For a good paper, it means that other researchers have pressed them on specific aspects of the work, which often produces stronger work (new methods, better baselines, clearer argumentation, clearer math).I see that as all true, but irrelevant in this context. If you source material from a pre-print on arXiv, then you should cite it. Seems totally obvious to me. Of course you would prefer the final, published paper if it's available. But that wasn't the question at hand.
And even with all that said... I would argue that in some fields, (cs / ml / etc.) we're getting close to a point where arXiv itself is become almost a parallel publishing mechanism where people cite/publish completely within the arXiv realm, with less regard for "traditional" journals and what-not in general. Especially when you factor in papers from researchers who come from industry, as opposed to academia, and care less about some of the normal trappings of academic publishing.
I adore arXiv but still believe it's a preprint.
Of course it's a pre-print. I didn't contend otherwise. I'm just saying that, from my perspective, it's obvious that you should cite a pre-print if it's relevant.
I will allow though, that norms probably vary from field to field, and as a non-academic, my take is likely different from, say, somebody who is deeply immersed in academia, pursuing tenure, etc.