Habitat degradation is a global problem and one of the main causes of biodiversity loss. Though widespread, the mechanisms that underlie faunal changes are poorly understood. In tropical marine systems corals play a crucial role in forming habitat, but coral cover on many reefs is declining sharply. Coral degradation affects the olfactory cues that provide reliable information on the presence and intensity of threat. Here we show for the first time that the ability of a habitat generalist to learn predators using an efficient and widespread method of predator learning is compromised in degraded coral habitats. Results indicate that chemical alarm cues are no longer indicative of a local threat for the habitat generalist (the damselfish, Pomacentrus amboinensis), and these cues can no longer be used to learn the identity of novel predators in degraded habitats. In contrast, a rubble specialist and congeneric (P. coelestis) responded to olfactory threat cues regardless of background environment. Understanding how some species can cope with or acclimate to the detrimental impacts of habitat degradation on risk assessment abilities will be crucial to defining the scope of resilience in threatened communities.