Peronsally I prefer a system where "game", and "user prefs" are in separate locations. In particular, anything that doesn't change in one place, anything that does in another.
The reason why I prefer this is that it makes backing up my prefs/saved games etc easier, because they are all in one place and I don't have to separate it from the files I get from a standard install.
The second reason is that it is possible (and easier) (theoretically) to keep the game files "safe" from being altered (especially .exe files if you want to protect from viruses), but games saves and preferences that need to be changed can.
However, I do agree that since windows doesn't have a standard for this (or rather it does, but it is poorly defined and no one follows it anyway), that it does get confusing when going from one game to another.
