This paper utilizes a new risk and outcome independent measure of ambiguity to explore the impact of ambiguity (Knightian uncertainty) and risk on innovation decisions. We view innovation as a real option, and show that ambiguity should decrease, and risk should increase innovation investment. Empirically, we find a consistently significant negative effect of ambiguity on R&D, patents and citations. We also find a significant positive effect of risk on R&D, but the effect of risk on patents and citations is negative and significant. Ambiguity matters more for high-tech firms, consistent with intuition.