Question

why distant objects looks smaller to our naked eye?

Answer 1

The size of the objects  - like largeness or tallness is measured by the angle subtended by the width or height of the object at our eyes.

The objects nearby make a larger angle at the eye than distant objects of the same size.  Thus we perceive them to be smaller. 

But the intelligence in our brain knows the knowledge about objects and hence is able to estimate the distance based on sizes perceived..

see the picture enclosed.