There's a few games, like Gladius and Costume Quest, where minigames and QTEs come into play. There, they modify your damage or evasion chances, but you could probably come up with a decent system based around it.
For example, the attacker could perform a precision-timed event to determine where their attack lands, or how powerful it is. The defender might be guided along an evasion sequence, and the resulting damage could be based on the difference between their results.
An ARG will tie-in to your real world experiences to put you into the state of the game. They often have elements that take place away from the computer, are widely social, and sometimes left with intentionally vague direction to encourage participants to collaborate together and share clues.
For example, Microsoft sent packages to participating players, hid clues in the content of seemingly unrelated websites, and arranged real-world phone calls and meetings to further the narrative of their ARG "I Love Bees," which ran as an advertising campaign for another product. You can get a better idea of what a largescaleARG is like by seeing how that one played out.
I'd put it this way: An RPG typically takes you into it's world, and an ARG takes itself into yours. They're gaining traction in education and awareness campaigns because the immersion forces the player to think in real world terms, and use their own capabilities rather than the (detached) limitations of a regular video game. A World without Oil was designed as an ARG to bring attention to that issue, and Tower of Babel is being used as a language building exercise.
It should depend on the style of play that you're going for, and how powerful the weapon is. Like Stormynature brought up, is a knife an insta-kill, or does it deal normal damage?
Using the knife with a hotkey seems geared more towards emergency or opportunity situations, usually with fast paced gameplay and high damage.
Drawing the knife and using it as a weapon can work when there's a little strategy involved in the combat itself, like CounterStrike knife duels, but you'd be at a severe disadvantage in a normal situation against armed enemies. The time and effort it takes to swap to and swing the weapon might not be worth it, especially if the damage is comparable to any firearms you could be using instead.
I don't feel virtual sticks are 'best', but it can be a compromise. Some types of games just respond better with a couple of axes and buttons than to any kind of tap, tilt, or swipe, platformers in particular.
It's also difficult to be 'first.' Even if your controls were intuitively designed, sticks and pads are our default inputs. If the game looks similar to anything they've played before, you're fighting against that acclimatization. With Windows 8, the majority of complaints are along the lines of "this is drastically different" and that's made it difficult for people to adapt.
If people are holding the device incorrectly, you could try drawing more attention to the controls when they first start up, get them to change the way they think about the game. Focus the first minute on the optimal way to play and throw in some messages suggesting on how to hold it. If there's a lot of different gestures or actions, don't overwhelm them all at once, get them to use them one at a time.
It sounds like if you can break them out of the virtual-stick mentality before they get the expectation that it's the way to play, they might have a better experience.
Sorting options were available to help you organize candidates based on their stats, and to have more than could fit on the screen. Each candidate also has their own specialization and skillset, forcing you to choose based on both their ratings and in what way they served.
I'm in favor of every courtier having their own specialization as it helps counter any of the lower attributes they might have - Choosing between a specialized (but corrupt) Military General for the Defense position, versus a loyal courtier with an irrelevant background, could add a level of strategic depth to your game.
As SiCrane said, Luck is found in quite a few games, and you can be pretty creative in how to apply it.
In some, Luck has a small affect on skills. It's usually much less of a bonus than you would get for a 'core' attribute, but it affects all of them. Or it can affect random events like loot drops and monster encounters. Many use it as a major component of critical hit formulas.
There's not really a reason to stop using XNA if you like it. They may stop updating it, but it still works. Otherwise, MonoGameis an open source, multi-platform alternative based on XNA so it should be easier for you to pick up.