I suspect there's too much of a difference in how much LW members know about basketball to get particularly wide participation. For example, I had to look up "March Madness" to figure out what this is about. Also, there's a significant chance that either people would just copy the odds from Pinnacle, or maybe even arbitrage against it (valuing karma or whatever at 1-2 cents). Or, well, I'd certainly be tempted to =]

Less Wrong is about rationality. Surely there are better ways to have fun than to arbitrarily redistribute our wealth. Unless you somehow plan to make some of the money go to charity, or not involve money at all, I don't see the point.