Research into the development of Theory of Mind (ToM) has shown how children from a very early age infer other people's goals. However, human behaviour is sometimes driven not by plans to achieve goals, but by habits, which are formed over long periods of reinforcement. Habitual and goal-directed behaviours are often aligned with one another but can diverge when the optimal behavioural policy changes without being directly reinforced (thus specifically hobbling the habitual learning strategy). Unlike the flexibility of goal-directed behaviour, rigid habits can cause agents to persist in behaviour that is no longer adaptive. In the current study, all children predict agents will tend to behave consistently with their goals, but between the ages of 5 and 10, children showed an increasing understanding of how habits can cause agents to persistently take suboptimal actions. These findings stand out from the typical way the development of social reasoning is examined, which instead focuses on children's increasing appreciation of how others' beliefs or expectations affect how they will act in service of their goals. The current findings show that children also learn that under certain circumstances, people's actions are suboptimal despite potentially 'knowing better.'