It just became tradition. Todd also said that it's a great way to begin the roleplaying experience. Immediately, the player comes up with an excuse as to why their character is in that prison, whether they murdered someone or they were framed or something like that.
That I would agree with. It's part tradition and part the role-playing benefits of starting in prison, aside from what Todd says about it, I'd also say that starting in prison has the advantage of assuming very little about your character. Aside from Arena, the game doesn't tell you why you're in prison, nor does it tell you who you were before you were in prison, after all, anyone could go to prison if there's a reason to convict you, and that doesn't have to be a good reason if you don't want your character to be a criminal, maybe your character was wrongly convicted, or maybe your character is in fact guilty but feels that the crime was justified. If you start out as say... a farmer, it says something about your character, which is, of course, that you're a farmer, you might also see your house, and maybe even your family and friends. As a prisoner, the game doesn't need to tell you anything about your character because you begin in a situation where the game can justifiably hide any details of your former life from you. Being a prisoner also allows the game to start you off with nothing more than the clothes on your back, because obviously, they wouldn't let convicts carry weapons around in prison, if your character gets released officially (Like in Morrowind.) they can always not return your possessions to you, and if you escape (Like in Oblivion.) then it's pretty easy to justify you not getting your items back, in the end, though, the game lets you start off with only what you can require at the beginning, which I'd say is a good reason to consider the prison start. After all, RPGs don't usually start with you already having good equipment. If you were an adventurer or something at the start, than one would logically expect to start with at least basic equipment, of course, you could begin the game with events that lead to you losing said equipment, but the prison into pretty much serves to do that by default. I wouldn't say it's the only start that achieves a similar effect, but it would probably be hard to find one that creates more of a blank slate short of the old amnesia trick, of course, when you pull that card then people probably expect you to eventually reveal what happened before the memory loss so maybe it doesn't have that effect after all.