Bárány was born in Vienna and educated at the university there, graduating in medicine in 1900. After studying at various German clinics, he returned to Vienna to become an assistant at the university's ear clinic. In 1909 he was appointed lecturer in otology. Through his work at the clinic he devised a test, now called the Bárány test, for diagnosing disease of the semicircular canals of the inner ear by syringing the ear with either hot or cold water. For this he was awarded the 1914 Nobel Prize in physiology or medicine. At this time he was being held as a prisoner of war in Siberia, but through the offices of the Swedish Red Cross he was released for the presentation.

In 1917 Bárány was appointed professor at Uppsala University, where he continued his investigations on the inner ear and the role of the cerebellum in the brain in controlling body movement. Bárány's pointing test is used to test for brain lesions.