You are wrong.

Intrade is based in Ireland and is illegal for US users. The Iowa Markets got a special exemption from the FTC as an academic research project.

And you can't sell derivatives unless you get regulator approval (which they won't give for betting markets) (see http://hanson.gmu.edu/ideafutures.html, for example).

Hanson (a professor of Econ at GMU, and contributor at overcomingbias) is one of the strongest proponents of legal prediction markets. He (and many others) have been lobbying for them forever, with no luck.

Thanks for the correction. I clearly did not know that. In my defense, I did add "can't tell you how legitimate [Intrade] is."

What's surprising though is that there are already investment instruments for transferring risks associated with outcomes. These are essentially predictions too, but you can only go "short" on life, so to speak.

Catastrophe Bonds, the recently infamous Credit Default Swaps are all instruments that pay off based on an outcome. In other words, they aren't really linked to the price of any commodity directly.

So, what gives? What's the difference?

Even if Hanson succeeds in getting betting markets legalized, they will still be regulated into near-uselessness. Censors will preside over them, excluding entire classes of bets. For example, this kind:

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