When we get cold, it starts a negative feedback loop in our bodies that tries to warm us back up. One of the big ways our body does this is through muscle contraction. Our muscles tighten, using energy to generate heat. It’s the same reason you shiver. When the muscles around the nipple contract, they also tighten their pull on the nipple, causing it to get harder.
To answer your second question, things seem to “shrink” on the body when it gets cold because they are again trying to gain heat. Your internal body temperature is ~98 degrees F (~37 degrees C), so the “shrinking” is really just trying to get more parts of you closer to this warmth. Evolutionarily, there’s not much reason to risk frostbite or other cold-related issues for the slim chance of reproduction while freezing, so we evolved to stay warmer at the small cost of “shrinkage” when cold.
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