It's a big idea of Overcoming Bias'[1] Robin Hanson[2] along with a proposed governing method based on it called the futarchy[3].

[1] http://www.overcomingbias.com/tag/prediction-markets (easily one of top 5 blogs on the Internet)

[2] http://hanson.gmu.edu/ideafutures.html

[3] http://hanson.gmu.edu/futarchy.html

There's a big difference between a prediction market and a decision market, which is what futarchy is. Mencius Moldbug expounded on this quite a while back in this post:

http://unqualified-reservations.blogspot.com/2010/02/pipe-sh...

I won't go into much detail (the post is worth reading), but his basic point (which I agree with) is that the reason a prediction market works (when it works) is that the only incentive governing people's bets is their beliefs about the expected probabilities of outcomes. But this can only work if the bets people make are themselves statistically independent of the outcomes, and in a decision market they obviously can't be, since people's bets determine the outcome. (In the post Moldbug gives an actual real-world example of a market which gets manipulated in exactly this way.)

I worked for a company that tried to sell prediction markets (we worked on the Policy Analysis Market, if anyone remembers that debacle), and the legality is one of the biggest sticking points.

It was pretty easy to sell the idea, but invariably once the contract landed in the legal department they'd put the brakes on, and we'd have to do some contortions involving play money that gets converted to real money and so forth. Once you start taking the real money out of the equation the results are a bit more suspect.

Nevertheless we did manage to convince a major media company, a couple large pharma companies, and an advertising company to set up some small scale prediction markets.

"other forms of online gambling such as poker are not"

That, of course, depends where you are - in some countries online gambling is completely legal.

My impression was that they were sort of ignored because they had academic/research value as cover.

I believe the Fed's recent interest in them had something to do with Intrade closing down.

Here's a snippet from a forum thread that's relevant:

http://forums.randi.org/showthread.php?t=125104

From Wikipedia: Because online gambling is outlawed in the United States through federal laws and many state laws as well, most prediction markets that target U.S. users operate with "play money" rather than "real money": they are free to play (no purchase necessary) and usually offer prizes to the best traders as incentives to participate. Notable exceptions are Intrade/TradeSports, which escapes U.S. legal restrictions by operating from Dublin, Ireland, where gambling is legal and regulated, and the Iowa Electronic Markets, which operates from the University of Iowa under the cover of a no-action letter from the Commodity Futures Trading Commission and allows bets up to $500.

They aren't legal in the US generally. A few like the Iowa Electronic Market have a special exemption and very low upper limits on spending. Others like Betfair and Intrade when it existed are hosted in other countries, e.g. Ireland.

Yeah, DARPA got spanked for wanting to set one up[1] and Jim Bell got personally destroyed[2] for writing about them[3] from a radical political viewpoint.

[1]http://en.wikipedia.org/wiki/Policy_Analysis_Market

[2] http://en.wikipedia.org/wiki/Jim_Bell

[3] http://www.outpost-of-freedom.com/jimbellap.htm

Right, and it had nothing to do with the fact it was proven he was using false identity documents to conceal money from the IRS. No sir. He was imprisoned just for writing an essay.

They were surveilling him were before the IRS charges. Not normal in a standard tax evasion matter.

Also, do people try to influence the outcome itself? For example, couldn't you ask: "When will X person die." And then someone could bet a huge amount of money on it, and then go kill that person?

You're thinking of Assassination markets [0]

[0] http://en.wikipedia.org/wiki/Assassination_market

I find assassination markets a fascinating concept: I wrote a short story about them ( http://www.gwern.net/fiction/The%20Ones%20Who%20Walk%20Towar... ) and pondered whether they might be a successor to Silk Road (http://www.gwern.net/Silk%20Road#future-developments probably not).

I think you try to setup the market so that X dies of natural causes. So that at least it is more work than to rub someone out outright.

In some jurisdictions the determinant is "game of skill" versus "game of chance".