Well, let's first look at the evidence - http://www.pbase.com/wjshaheen/project_moon_illusion shown below.
As you can see, the recorded images are the same size. And, if anything, the moon should be larger since it is 4,000 miles closer to the observer. I've also read that the atmosphere's refraction should actually make the moon appear smaller.
So, why the illusion?
The theory that the illusion is due to foreground objects (trees, etc.) is contradicted by the fact that pilots frequently observe the same phenomonon. (See, "Airline pilots flying at very high altitudes sometimes experience the Moon Illusion without any objects in the foreground." in http://science.nasa.gov/science-news/science-at-nasa/2005/20jun_moonillusion/ )
What causes the illusion?
The cause of the illusion has been debated for centuries but the more recent explanation is that it is due to the Ponzo illusion. (Thank goodness his name wasn't Ponzi, but that's another story.)
It turns out that we tend to see the sky, and the world around us for that matter, as being flat. We see objects in the sky (clouds, airplanes) as getting smaller with distance. So, we think of the sky above us as a flat plane. Whereas, the moon's orbit, and the sky in general, is a globe, or dome, over our heads. As a result, we "expect" to see the rising moon to be smaller.
But, no matter how you look at it, it's still a beautiful site.
Here are some references that explain the effect much better than I:
http://en.wikipedia.org/wiki/Moon_illusion - See "Apparent distance hypothesis".
http://www.lhup.edu/~dsimanek/3d/moonillu.htm - Also shown in today's APOD.
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