I have a simple table (named test) as:
id     | integer                
name   | character varying(100) 
intval | integer
When I try to use prepare statement to update the name like this in python. (I am using python-pgsql http://pypi.python.org/pypi/python-pgsql/)
>>> for i in db.execute("select * from test"): print i
...
(1, 'FOO', None)
>>> query = "UPDATE test set name = '$1' where name = '$2'"
>>> cu.execute(query, "myname", "FOO")
Traceback (most recent call last):
  File "<input>", line 1, in <module>
  File "/usr/lib/python2.7/site-packages/pgsql.py", line 119, in execute
    ret = self._source.execute(operation, params)
ProgrammingError: ERROR:  could not determine data type of parameter $1 
The demo file for the module can be seen at http://sprunge.us/VgLY?python.
I'm guessing that it could be your single quotes around $1 and $2 inside your string. In the main changes from PYGresql it says that: 
So I'm assuming the single quotes are overloading the string with too many quotes, or just breaking the parser in python-pgsql.
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