Interest Based Advertising allows Google Adsense to display ads depending on users interest. Means if a user browses many technology related sites where Adsense ads are placed and then visits any entertainment site, even there Adsense displays more technology related ads. When any user comes across Google content network (like youtube, google search, gmail) then they places a cookie (which do not collects their personal information) in their computer which lets them know the interests of that user and then when that user enters any site displaying Adsense ads, then Google shows more ads related to his interests.
How it is different from the past ?
Before Google used to place ads depending on the content of the site. If a site contains more content, keywords on technology, then it places Ads related to only technology ads. Now Google places ads depending on users interest which may not be related to sites content. Suppose if a user watches many movie clips in Youtube and then visits any technology site then Google shows entertainment related ads which are not relevant to sites content which benefits sites owner because there is more probability that a user click on ads. It seems Google tested this Interest Based Advertising program from a long time because even before few months when i searched for many webhost related things in Google search and after that visiting any entertainment site, then i used to get all webhost related ads in that entertainment site which is purely not relevant to sites content.