A central focus of population ecology is understanding what factors explain the distribution and abundance of organisms within their range. This is a key issue in marine systems, where many organisms produce dispersive larvae that develop offshore before returning to settle on benthic habitat. We investigated the distribution of the neon goby, Elacatinus lori, on sponge habitat and evaluated whether variation in the persistence of recently settled individuals (i.e., settlers) among different sponge types can result in habitat preferences and establish their observed distribution. We found that E. lori settlers were more likely to occur on large yellow tube sponges (Aplysina fistularis) than on small yellow sponges or brown tube sponges (Agelas conifera). An experiment seeding settlers onto multiple species and sizes of sponge habitat revealed that settlers persist longer on large yellow sponges than on small yellow sponges or brown sponges. Habitat preference experiments also indicated that settlers prefer large yellow sponges over small yellow sponges or brown sponges. Settlers achieved these preference behaviors using visual, but not chemical, cues. Finally, new settlers arriving from the water column were more likely to occur on large yellow sponges than on small yellow sponges or brown sponges, indicating that the observed habitat preferences existed independent of prior experience. These results support the hypothesis that E. lori have evolved behavioral preferences for sponge habitats that will maximize their post-settlement persistence, and that decisions at settlement will shape the population level pattern of settler distribution on coral reefs.