The Laughing Fungus is a Rare item in Golden Sun: The Lost Age. It is found in Gondowan Cliffs, and an old couple in the relatively nearby town of Madra are seeking a big mushroom to use for dinner. If you try turning this in to them, they will remark that it is not the actual type of mushroom they like and indicate that the party should find a different mushroom the next time they are at Gondowan Cliffs. However, if you give this to the fortune teller in Naribwe, he will do a silly dance before telling you what to do next (This item will return into your inventory). Afterwards, this mushroom can be sold for 525 coins, which at this point in the game can be a pretty nice financial boost, and the player may later find the other mushroom, the Healing Fungus.
On a side note, the mushroom in the icon of Laughing Fungus appears similar to Amanita muscaria, a psychedelic mushroom. This could have led to the name Laughing Fungus. This is the only plausible drug reference in the whole series.