The 28-year-old turned in a ride for the ages to get the John Symons and Sheila Laxon-trained gelding home.
Knight's Choice, a son of Newgate stallion Extreme Choice, settled towards the rear but started to improve towards the inside when a number of leading chances who were also back in the second half of the field made their move out wide from the 500m.
The five-year-old surged alongside eventual runner-up Warp Speed over the final 300m and hit the line a half-head clear that Japanese galloper, a $26 chance who was ridden by Akira Sugawara.
Completing a longshot trifecta, three-quarters-of-a-length away, was Jamie Kah's mount Okita Soushi ($19).
"I thought I'd be a pair closer, but they went quick, so I just rode him for luck because I know he's got a good turn of foot," Dolan said.
"Once my horse spotted the gap and he sort of changed leads, he just picked up on me.
"Once I pulled the stick through, he found another gear again.
"He's only a small little horse, but he gives his all every start, and that's half the battle with him.
"I think and he's proved a lot of people wrong."
Dolan became the second Irishman to win the Melbourne Cup, 31 years after Michael Kinane won aboard the Weld-trained Vintage Crop.