El Farol Bar Problem

Setup and self-defeating forecasts

Arthur (1994) used the example of Thursday nights at a Santa Fe bar featuring Irish music. Players know only attendance over past weeks and must decide whether to go this week. If everyone predicts it will be quiet, everyone goes and it is packed; if everyone predicts a crowd, no one goes and it is empty. Because a shared forecast negates itself, there can be no single rational forecasting model that everyone follows. This undercuts the premise of rational expectations, and while it resembles the Keynesian beauty contest in requiring people to read others' minds, it differs in that you win by going against the majority.

Inductive reasoning and an ecology of forecasts

Building on Simon's (1955) idea of bounded rationality, Arthur ran an agent-based simulation in which people hold several forecasting rules, such as 'same as last week,' 'average of the last four weeks' or 'mirror image of last week,' and act on whichever has performed best recently. Mean attendance fluctuated around 60, and no rule stayed dominant; forecasting rules competed like an ecology. Arthur et al. (1997) applied the same idea to an artificial stock market, Fogel, Chellapilla and Angeline (1999) reexamined the results with evolutionary computation, and Arthur (2015) presented the problem as a core example of complexity economics.

The minority game and experiments

Challet and Zhang (1997) simplified the problem into the minority game, in which an odd number of players choose between two sides and those on the minority side win, and Challet, Marsili and Zhang (2005) developed it into a model of interacting agents in financial markets. Savit, Manuca and Riolo (1999) found a phase transition in market efficiency depending on agents' memory length, and Johnson, Jefferies and Hui (2003) extended this into research on financial market complexity. In the lab, the market entry games of Rapoport et al. (1998) and the minority game experiments of Bottazzi and Devetag (2007) showed aggregate entry coordinating remarkably close to equilibrium, and the commuter route-choice experiments of Selten et al. (2007) reported similar patterns in congestion games such as traffic congestion.

FAQ

What is the El Farol Bar problem in simple terms?

A bar is fun if not too many people show up and miserable if it's packed. If everyone thinks the same way, their prediction backfires, so deciding whether to go is harder than it looks.

How is it related to the minority game?

The minority game is a simplified version of El Farol in which whoever picks the less popular of two options wins. It's used to study situations like financial markets, where you profit by doing the opposite of the crowd.

Sources reviewed: 2026-10-26

References

1. Arthur, W. B. (1994). Inductive reasoning and bounded rationality. American Economic Review, 84(2), 406–411.
2. Challet, D., & Zhang, Y.-C. (1997). Emergence of cooperation and organization in an evolutionary game. Physica A, 246(3–4), 407–418.
3. Challet, D., Marsili, M., & Zhang, Y.-C. (2005). Minority Games: Interacting Agents in Financial Markets. Oxford: Oxford University Press.
4. Simon, H. A. (1955). A behavioral model of rational choice. Quarterly Journal of Economics, 69(1), 99–118.
5. Savit, R., Manuca, R., & Riolo, R. (1999). Adaptive competition, market efficiency, and phase transitions. Physical Review Letters, 82(10), 2203–2206.
6. Johnson, N. F., Jefferies, P., & Hui, P. M. (2003). Financial Market Complexity. Oxford: Oxford University Press.
7. Arthur, W. B., Holland, J. H., LeBaron, B., Palmer, R., & Tayler, P. (1997). Asset pricing under endogenous expectations in an artificial stock market. In W. B. Arthur, S. N. Durlauf & D. A. Lane (Eds.), The Economy as an Evolving Complex System II (pp. 15–44). Reading, MA: Addison-Wesley.
8. Selten, R., Chmura, T., Pitz, T., Kube, S., & Schreckenberg, M. (2007). Commuters route choice behaviour. Games and Economic Behavior, 58(2), 394–406.
9. Bottazzi, G., & Devetag, G. (2007). Competition and coordination in experimental minority games. Journal of Evolutionary Economics, 17(3), 241–275.
10. Rapoport, A., Seale, D. A., Erev, I., & Sundali, J. A. (1998). Equilibrium play in large group market entry games. Management Science, 44(1), 119–141.
11. Fogel, D. B., Chellapilla, K., & Angeline, P. J. (1999). Inductive reasoning and bounded rationality reconsidered. IEEE Transactions on Evolutionary Computation, 3(2), 142–146.
12. Whitehead, D. (2008). The El Farol Bar problem revisited: Reinforcement learning in a potential game. ESE Discussion Papers 186, University of Edinburgh.
13. Arthur, W. B. (2015). Complexity and the Economy. Oxford: Oxford University Press.