Is that the correct way to configure it?
By default, SQL Server runs under the Network Service account. You could try that and see if it helps.
A few other tips:
1. Make sure the account used by SQL Server is able to read from and write to the App_Data folder as instructed in the book.
2. Try removing the User Instance attribute from the connection string and see if that helps.
3. Search Google for the exact error message you're getting. It's a common error with - unfortunately - many resolutions so it's hard to give exact advice here. Reading some articles about the problem and its solutions may put you in the right direction.