Thanks, I was wondering about that, too. That diagram helps explain it. But I still don't understand circle 3. According to perspective rules, shouldn't the moon appear much, much smaller, since it's so far away?
Basically, the argument here is that we judge the size of things in the sky under the assumption that they are in the sky. But the moon is not; it does not follow the perspective rules of things that are actually close to us. The figure is saying that when we see situation 1, our brain assumes situation 3 will hold.