Wind direction is notoriously fickle - just look at a Met Office graph from one of their expensive anemometers. On small low interia wind vanes it will be much worse.
Mechanical wind vane steering has been used by sailing boats for a very long time. The mechanisms are expensive. I suspect they rely on the existence of a lot of inertia in the system - the forces on the rudder, the mass of the boat etc. There is probably also an interaction between the effect on the boat direction of gusts and the effect of the same gusts on the steering.
In my personal experience the little flag thing at the top of the mast is no use to the helmsman, a much better indicator of average wind direction is obtained from the sound of the breeze in my ears. (By the way I have never raced a sailboat and those who can do so successfully may have a different view, but I suspect they won't).
What about building a purely mechanical wind vane steering system and when it works properly try disconnecting the wind vane from the steering and interposing an Arduino between them?
...R