In the above picture the size of the moon varies: it becomes smaller when the mouse hovers over the image (or you tap it). Which size is the correct one, given the perspective of the scene? Answer: the smaller one, nearly unbelievable.
The “moon illusion” consists of two phenomena: (1) the moon appears larger than it actually is, and (2) this enlargement is much stronger on the horizon than at the zenith. Generally, any celestial objects near the horizon looks larger than when the same object is high on the sky.
The moon in the above picture is of “aesthetically correct” size. By placing the mouse over the picture (or tapping it) the actual size is seen (pictures from Rock 1984, based on the painting by Honoré Daumier »O Lune! … Inspire-moi ce soir quelque petite pensée…« 1844).
The moon illusion is usually explained through size constancy, with the necessary additional assumption that the ‘default’; distance for any object is less than the horizon/skyline distance.
Amazingly, when you bend over and look through your legs, the moon illusion is greatly diminished (Coren 1992, Higashiyama & Adachi 2006)! This underscores the influence of context on size constancy.
The painting reminds me of Spitzweg’s “Der arme Poet” (1839). With “Poète dans la mansarde” (1842) and “Locataires et Proprietaires: Brigand de proprietaire” (1847). Daumier repeatedly took up this topic
Rock I, Kaufman L (1962) The Moon Illusion, I: Explanation of this phenomenon was sought through the use of artificial moons seen on the sky. Science 136:953–961
Rock I, Kaufman L (1962) The Moon Illusion, II: The moon’s apparent size is a function of the presence or absence of terrain. Science 136:1023–1031
Rock I (1984/1995) Perception. New York: W.H. Freeman, Scientific American Library
Coren S (1992) The moon illusion: a different view through the legs. Percept Mot Skills. 75:827–831
Kaufman L, Kaufman JH (2000) Explaining the moon illusion. PNAS 97:500–505 [PDF]
Ross HE and Plug C (2002) The mystery of the moon illusion: Exploring size perception. Oxford University Press. ISBN 0 19 850862 X
Higashiyama A, Adachi K (2006) Perceived size and perceived distance of targets viewed from between the legs: Evidence for proprioceptive theory. Vision Res 46:3961–3976
Donald E. Simanek has a nice overview of various moon-illusion explanation attempts
Discover Magazine 2010-05-13 “Why does the Moon look so huge on the horizon?”