We propose that investors misreact differently to technological innovations based on novelty, and that these misreactions exert a real impact on firms' future innovations. First, using textual measures of novelty, we find that investors underreact to the issuance of path-breaking innovations but overreact to trend-following ones. Novel patent issuance predicts lower risk and positive forecast errors, consistent with a non-risk-based mispricing mechanism. A model where boundedly-rational investors are unsure about the true novelty of a patent at issuance, explains the empirical patterns well. Second, using exogenous distraction shocks, such as sensational news, we present causal evidence that, after disappointing returns to patent news, novel firms shift from creating and following up on novel innovations to copycatting. The findings highlight that investors' misreactions to patent novelty steer innovation away from higher-valued, groundbreaking research.