"The 'moon illusion' is one of the oldest known psychological phenomena; records of it go back to ancient China and Egypt. It may be the most ancient scientific puzzle that is still unexplained.
"There are many misconceptions surrounding the moon illusion. People trained in the physical sciences often think that the illusion is real, that the moon actually looks large when it is near the horizon because of refraction of light by the atmosphere. In fact, there is a very small refractive effect, but it is not the cause of the illusion.
"There are a couple ways you can prove to yourself that the light reaching the eye from the moon remains the same as the moon changes position in the sky. For instance, if you photograph the moon at various heights above the horizon, you will see that the images of the moon are all the same size. My students frequently send me photos of a 'giant' harvest moon in which the moon looks like a small spot in the sky. (The same thing happens in photos of seemingly spectacular sunsets--the illusion works for the sun as well.) Another way to break the hold of the illusion is to cup your hand into a fist and look through it at the 'large' horizon moon. It will immediately shrink in size.
"Clearly, this is a psychological effect. There are many different theories (perhaps 10) for why it happens, taken from fields ranging from cognitive psychology to neurophysiology.
"My own view is that the moon illusion is linked to the mechanism that produces everyday size-distance perception, a genetically determined brain process that allows us to translate the planar images that fall on the retina into a view of rigid objects moving in space. I believe the moon illusion results from what happens when the mechanism operates in an unusual situation. In normal perception, when rigid objects move in depth (distance), the angular size of the light image stimulating our eyes grows or shrinks. The brain automatically translates this changing stimulation back into the perception of rigid objects whose position in depth is changing.
"When the moon is near the horizon, the ground and horizon make the moon appear relatively close. Because the moon is changing its apparent position in depth while the light stimulus remains constant, the brain's size-distance mechanism changes its perceived size and makes the moon appear very large.
"The history of the moon illusion and the details of alternative explanations can be found in my book: The Moon Illusion, by Maurice Hershenson (Lawrence Erlbaum Associates, Hillsdale, N.J., 1989).