I was disappointed by the Straight Dope article. I think I recall a lively discussion about it at the message boards over there, which I can't find now. It was pointed out that flies seem to have no problem hanging around tables, lighting right next to a glass full of water. If these bags 15 feet away are supposed to scare them off, why aren't the phased by a glass of water right next to them?
It's just not plausible to me. Unless there has been a quality study showing that it really works, without a plausible mechanism, it is likely a false belief.
A couple of weeks ago I was visiting my relatives in New Mexico, and they're having an unusual influx of flies. There was this bag of water hanging above the doorway, which started a discussion of how they've seen it in restaurants, and of course I expressed the skeptical view. Their view was that since restaurants do it, it must work, and someone said something that it's surprising. I said "It's not surprising to me - people believe all kinds of silly things."
Which wasn't the right thing to say. I wish I had instead asked my niece how she could determine for herself why it really works, how you could control for confounding variables, etc. That would have been much better. Then I could move on to the point that probably no one has ever tested out the idea with proper controls, and how unlikely it is to work because of that.